SSO Trade Update

With Tuesday's big market advance the SSO trade is now in a profitable position. Most overseas markets are continuing the advance Wednesday.

Despite the monster day yesterday, the short term model is not overbought yet, so if the market continues higher for the next day or so and gets overbought, the SSO trade should be another big gainer.

A wild card today will be the Fed meeting which will determine interest rate changes. While I don't know what they will decide or how the market will respond, realize that the reaction to these types of changes can be violent. In this case, there is the chance that the violent reaction will be to the upside as there is lots of negativity that could potentially be "reversed" off a news item like a favorable rate change. Looking at historical declines and advances in bear markets, the expectation would be a 30-40% advance from the low point of this decline. The time frame would typically be 4 months or less, and I think that in this case it is likely to be less if we do get a bear market rally on par with historical rallies.

Based off of chart analysis I view the 1100 area in the S&P 500 as either a topping area for a bear market rally, or at least a ceiling on any intial thurst upwards above this month's highs around 1050.

For trade management purposes in the past I have said that my bottom line using the short-term model has been much better with out using a stop loss to get suckered out in this volatile market. But for money management purposes I would suggest quickly moving a stop loss to a breakeven position on any further market strength, especially if the market gaps up Wednesday morning. Certainly a stop loss could be in place around 26.00 on SSO now with little risk of getting stopped out of a (should be) successful trade.

I will post the exit when the time comes.

Trade Updates

Using today's opening price for SDS of 102.33 the trade made an 11.2% gain up form 92.04 entry price at the open on Oct 15. I have learned from past experience that the model serves me better when if I just wait for the signals and do not set a stop loss that would prematurely exit the trade.

In real life, someone should be advised to use a stop loss, but if you are trading this system with a smaller portion of your capital, I think it is best to not use a stop loss. I filter what signals to act on by going in the direction of the prevailing trend, and then also using candlestick patterns and market sentiment to act on occasional reversal points.

Also, the opening price for SSO was 28.37 and that is the price I will use to track this trade. For someone in the trade I would suggest a stop loss of 26.20 if you like to have a defined risk for money management purposes.

Pete

SDS Trade Exit, New SSO Trade

Today the short-term model neared the oversold region heading into the close. It is not quite there but is very close and I believe that it is close enough to recommend an exit in this environment.

Remember that I had suggested a stop loss when the trade was profitable and near oversold last time. That had resulted in a breakeven trade if following that suggestion. However I also said that I would post the exit when the short-term model actually got to oversold. So that is what I am doing now and would definitely suggest exiting if you have not done so already.

The closing price on SDS is 102.50 today. I will use tomorrow's opening price as the trade exit price to more accurately gauge the profit/loss of anyone following these updates.

Recommendation:

Sell SDS with a market order tomorrow morning (10/23/08) if you are currently holding SDS shares.

Now in this case I am suggesting using this oversold signal as an opportunity to buy SSO. SSO is the exact opposite of SDS. SSO will profit as the market rises and vice versa. I will use SSO's opening price tomorrow as the entry price for the trade.

Recommendation:

Buy SSO with a market order tomorrow morning (10/23/08).

Updates on SDS

Today, the 92.00 level was hit and should have resulted in a "breakeven" stop loss order triggered for anyone in the trade on SDS. This afternoon the short-term model once again hit overbought territory. Remember from the last post that it never actually got to the oversold extreme yet, so that is why I did not post an exit.

I personally was not in that trade. However, after today's overbought reading and reversal in the markets, I bought SDS at 94.80ish. I have a stop loss of 86.80 or today's low in SDS.

I think we are at a "breaking point" in the market right now. Price has been converging over the past week. So it is like a spring coiling. With high volatility, a price converging pattern I think sets up a ridiculously strong thrust in one direction.

The fact that I bought SDS reflects my belief that the market may have at least one more strong move down before a more lasting bottom. If that the gets stopped out, it is probably because the strong thrust is beginning to occur to the upside instead.

I'll keep you posted.

Pete

SDS Trade Update and Other Stuff Too

This morning the short-term model on the S&P 500 was nearly oversold around the time the the gap at 88.50 was filled that I mentioned last post. The trade was outstandingly profitable at that point. However, there was a huge reversal today in very high volume making the trade only slightly profitable.

My suggestion for anyone with actual money in this trade is to place a stop loss at 92.00 which was just above the opening price yesterday and should create a "breakeven" trade if the markets rise tomorrow. As for following the trade, I will continue to wait for the model to make its next oversold signal before posting the exit price.

This is a difficult market to make accurate judgements on a day like this. Normally a 4% up day in higher volume coming off a potential market bottom would be a clear "follow-through" day like I've mentioned in prior posts. However, 4% is a pretty average to low % gain considering recent up and down price swings in the market. Also, a potential follow-through day should usually show some stocks breaking out of consolidation patterns. That is not really the case right now as there is no real market leadership and stocks are broadly damaged with few forming any legitimate basing patterns.

If I had to pick one direction for the market over the next few weeks, from the price charts I would say up.......but I really don't trust buying right now. Again, if the market can make legitimate headway, and then make another oversold signal at a higher level, I would strongly consider recommending a bullish ETF trade.

Pete

New SDS Trade

The short-term model was overbought yesterday, but there was no clear resistance in sight until 110 on SPY that I saw, so I did not want to recommend an inverse ETF trade. Also, with many signs of bottoming behavior I didn't want to get caught in the middle of a larger trend shift. Today the model came back just out of overbought territory and is far from oversold currently.

Today has changed the picture some as for how I interpret likely scenarios from here. I see a likely target on SPY as 88.00. Also, today's exhaustion type gap and bearish candlestick gives a good stop loss point and sign of at least some likely market weakness to come.

Without all the details, here is the trade recommendation:

Buy SDS with a market order tomorrow morning (10/15/08).

Pete

XLE Morning Star Candle Stick

Click on the Chart to Enlarge

This chart is of XLE. XLE is an exchange traded fund that tracks energy stocks. It shows a morning star pattern which is a high reliability bottoming candlestick pattern.

There should be a large down day (dark candle) followed by a gap down and a candle that has a small fat part (called the "real body"). Then the next day should gap up and the white candle should close at least half way up the real body of the prior large dark candle.

The higher the volume and more technically oversold, the more significant this pattern. Also notice that the small "star" candle (the second to last one from the right) formed well outside the bollinger bands that overlay the chart. Those bands should contain 95% of all data in them, so whenever you see a classic reversal pattern happen at an extreme outlying point, that should add confidence as well.

I bought a call option on this yesterday.

Pete

SSO Trade Exit

With today's big market advance the short-term model has become overbought. The current price of SSO is 32.66 down from 35 and change at entry. So this was by far the worst trade since I have posted trades starting in April. There was massive intra-trade volatility and a significant loss though it pales in comparison to recent gains on other trades.

I think that it is likely that holding this trade will lead to further gains ove the next couple weeks, but to do that I would absolutely put a stop loss somewhere a few cents below Friday's low in case this vertical decline is not done yet.

If the short-term model becomes oversold in the next couple weeks while maintaining a price comfortably higher than Friday's close, then I will be likely to suggest a new trade at that point.

Pete

Piercing Line Candlestick - Russell 2000

Click on the Chart to Enlarge

The chart above is of the Russell 2000 index. Every chart tells a story. The charts and experiences you live through in real time so that you understand the emotion that accompanies them will have the greatest impression and learning value on you.

When the market is in freefall, certain price pattern consistently emerge at the turning points, some higher reliability, some with lower. A piercing line pattern happens when the market is downtrending, and then there is a gap down, but there is immediate buying and the close of the day closes well into the prior black(down day) candle. The rule is that the close of the piercing day should be at or above the halfway point of the prior black candle. The larger the gap down, the higher the volume, and the higher the close, the more bullish the interpretation. One interesting thing about the current candle is that it has a long lower shadow also. While this is not your typical piercing pattern candle, the rejection of lower prices should not logically be any more bearish than a classic candle that advances right from the open.

All the major indexes showed bullish candlesticks at the close Friday. This has not occurred in a couple weeks, so maybe we will finally see a bounce right now. In order to have a good confirmation that we may see some legitimate buying pressure for several days or weeks, we would want to see a large white candlestick tomorrow or a large gap up with at least some additional gains that hold into the close.

Pete

SSO Trade Update

I entered SSO today for an average price of 33 dollars and change on a limit order. The market blew past that a ways.

The only real consolation for this large intra-trade drawdown is that the upthrust after comparable historical periods tends to be very strong (about 10-15% on the SPY ETF) over the next week or two. There still exists a reasonable chance that the SSO trade will be profitable at the next overbought signal.

For someone who is not in the trade yet, I would still get into it. The model dipped back to oversold today. Despite palpable fear and perceived risk, these types of market moves have led to the biggest short-term gains historically.

I put about 25% of my account funds into SSO today. I would not advise putting a whole lot more than that. The time to starting increasing exposure is when the market has clearly turned, and then you get an oversold signal at a much higher bottom than is occurring now.

Doji Candlestick on SPY

Click the Chart to Enlarge

I have been waiting for a classic bottoming candle stick pattern to appear before starting to enter any bullish trades (expecting the market to rise). Finally today we got a truly classic candle pattern. The pattern is called a doji when the opening and closing price are the same or very close. This appears like a long line with a small cross hash mark on it.

The Japanese rice market traders who first discovered these patterns talked about how the market is in perfect balance when a doji is formed.

Stop and think about this..........the market moved wildly on almost the heaviest volume (most shares exchanged) in the history of the market. If you study price history you will know that huge volume days tend to have BIG price movements from open to close. Whenever a high volume, wide range doji happens something very rare is occuring.

I like to think of the Doji candle as an analogy to the apex point of a ball thrown high in the air. No matter with what force you launch that ball, at some time, at its highest point, the instantaneous velocity will be ZERO....momentary perfect balance. Then the ball will quickly change direction and fall down. The doji is the same. It is a point of momentary balance (no change from open to close) right at the apex, or turning point in the market.

Now it is certainly possible that today will not prove to be the lowest point before a major price advance, but I would heed the warning of the doji. I believe that based on many different factors, we are within hours to days of beginning a large advance in the market.

Pete

New Trade - SSO short-term Oversold

With the market in shambles it may seem crazy to recommend a trade that expects the market to rise. But that is the nature of the markets and the model I use for these trades. Most times I focus on buying low points in an uptrend. But ridiculously strong upthrust can form after the bottom of a down-trend, especially the expanding type that has been forming.

The short-term model for the S&P 500 is now both over sold and it is divergent with the prior oversold signal. Divergence is a term used in technical analysis that describes a situation where the indicator you are using is not following the same trend as price is. Divergence often happens before trend shifts.

Without further ado here is the recommendation:

Buy SSO with a market order today Oct 8th. or at the open tomorrow.

The current price is 35.25 which I will use to track the trade.

Pete

Thoughts on How to Use this Blog

My goal with this blog is to give any regular reader a way to take control of their investments and to be able to have steady growth with minimal drawdowns (periods of declining portfolio value), all despite the market going up or down.

In my opinion you should expect to have about $2500 or more to devote to trading/investing. If you have $2500 or greater and open a Zecco.com account you can trade with no commission for up to 10 trades a month. That is more than enough for following the trades on this blog. Since April I have averaged 2 recommendations a month (totaling 2 buys and 2 sells). I am not including any option trades or other more exotic stuff. I am just referencing the "short-term model" trades that I post.

I calculated the cumulative return on the recommended trades I've made since April. Assuming no commission, the return is about 77% since April on an initial investment.

Based off of a lot of information and historical comparison that I look at, I think that the markets will perform poorly for a the next few years (maybe 2-4 years) if holding typical stock investments or mutual funds. The positive side to this, is the in "bad" markets volatility is usually quite high, and the trades I recommend will be more frequent and more profitable in volatile environments. I truly think the next couple years will offer a far better profit opportunity than most typical investors could expect in very strong markets.

Always take some time to follow a methodology in theory before using real money. Also, do your best to educate yourself on concepts and terminology used so that you can be somewhat comfortable in using that methodology.

Please post any questions or ideas in the comment section.

Pete

SDS Trade Exit

With today's big decline the short-term model is within a hair's width of oversold. It could get worse, but I am able to post now, so my suggestion is to exit the trade. The current price is 87.30 up from 66.66 for a whopping 31% gain!!

With each passing day things are getting more volatile and more extreme. History tells us that a buying opportunity/market bottom is close at hand. The bigger question is how violently the market will move in a few days time. That will affect the risk-reward ratio of a trade and how good or bad of a price you get in retrospect.

I will wait on recommending a new trade till some of the smoke clears.

Pete

New Options Trade on CL

Click on the Chart to Enlarge

The chart above is CL which is Colgate-Palmolive. I have had a put option on this for a couple weeks now and it is somewhat profitable currently though far from its maximum gain.

The pattern here is that the stock broke down sharply from its early September high pretty much signaling that a larger corrective/decline is occurring. Now the stock has made a choppy advance back up to the 20 day moving average and formed a bearish engulfing pattern yesterday. Based off this pattern I think that another sharp decline is likely, and will take the stock below 72.00.

My recommendation is to buy an Oct. 75 Put on CL at a limit of 1.60.

The current price of the option is 1.50. If the stock gets to 72.00 before expiration on Oct. 17th, then that would be 100% gain or better because the option would be worth a little more than 3.00. In this case I would not suggest using a stop loss on the trade, so the risk is 100%. but the reward should also be 100% or better.

The exit strategy I would suggest is placing a limit order for 100% gain after entry or exit on expiration day if 100% is not achieved.

Pete

SDS Update

Today the House votes on the revised "bailout" plan. While speculation on these types of things isn't the norm for me, my guess is that it will not pass, or that the market will respond unfavorably to all the baggage in the bill.

There are a couple scenarios I think could play out here. As far as exiting the SDS trade from last week, the short-term model is not oversold yet. If today is a huge down day after all the news comes out, I would suggest exiting right before the close today. I'm sure the model will be oversold or very near it if that happens. I can't always immediately post when the model hits an extreme, so that is my suggestion. Also, because the potential exists of news sparking a positive market days of large proportions, I would suggest putting a breakeven stop loss order in on the trade early today for protection.

Looking ahead to the next few days, think a significant shift is going to occur in the market trend for at least several weeks. This is based off of past "post crash" market scenarios. Typically it results in upward biased choppy price movement, which should be great for the methodology of the trades I post on this blog.

Pete