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

SDS and General Market Update

The house of reps. did not pass the "bailout" bill. This has obviously created some panic in the market place.

This has been very beneficial to the SDS trade I posted a couple days ago. The short-term model is not oversold on that yet, so stay tight there.

Also, this break of the extreme panic low earlier this month creates a situation that I think could be very dramatic and cause a waterfall type (near vertical) decline in the stock indexes taking them down several more percent over the next few days. At that point, based off of price pattern form and current sentiment, I believe there will be a large reflex reaction in the market causing it to rise sharply, probably for a couple months or more. However, realize that this is still a bear market and this does not mean the worst is over.

For trading purposes I think this will be an excellent trading environment for making money due to extreme volatility in short-term swings. I would suggest anyone reading this blog follow the short-term trades I post on this blog as they will take advantage of these swings.

Pete

New SDS Trade

The short-term model for the S&P 500 has become overbought today. I'll admit a little hesitation on recommending a trade at this juncture, but the overbought signal at a lower high than the prior signal is one thing I look for in recommending an inverse ETF trade. I feel the downside risk to a disappointment in the "bailout" situation is more substantial than the upside potential for any agreement. But that is a wild card that is giving me hesitation right now, in addition to the fact that I believe we are very close to an intermediate term market bottom, or may have seen one already.
Nevertheless..........

Recommendation:

Buy SDS today before the close. The current price is 66.66 (a bad omen....or is that good in this case.....), and that is the price I will use to track this trade.

Pete

Follow Up on Gaps and Short-term Status

Click Chart to Enlarge

I made a post a few weeks ago about looking at gaps on price charts. The summary is that most significant gaps are retraced (meaning price comes back to the gap point) relatively soon. Also, there should be some expectation of pause or reversal at/around significant gaps.

The chart above shows a chart of SPY (S&P 500 ETF) and shows that the massive gap from last Friday has been retraced now. That coincided with short-term oversold conditions on the model I follow. So far it has led to a little bounce in prices which I would expect.

Now the thing to look for is if this gap holds the next couple days. The short-term model is currently nearing overbought peaks that marked reversal points the last couple weeks. No doubt news about "the bailout" will trump most other factors, but I will be looking to recommend a double inverse ETF trade if the model actually reaches overbought territory.

Realize that SPY has a long way to go before moving above the last short-term overbought high which was last Friday. If it gets overbought before that high is breached, my inclination is to stay bearish for at least one more move lower in the markets.

Looking Ahead (Gold and US Stocks)

Click chart to view a larger image

In this blog I have made frequent posts relating to stocks, but also to gold and oil. Oil is what drives our world, and gold is the money of the ages. Oil and gold prices have strong positive correlations, while the correlation between oil and stocks or gold and stocks is not consistent for long periods.

Right now my view is that stocks, oil, and gold are in bear markets. I think all are likely to go down further in the next several months and probably longer. In bear markets, the best opportunities to make money are when the price is falling, because that usually happens at a very fast rate.

Gold and stocks have had a relatively strong negative correlation this year, and I think that is likely to stay for a little while. Gold has made a massive price advance the last couple weeks that has made its momentum based indicators the highest they have been in years. These times tend to correspond with tops in gold prices. I am waiting for a good candlestick pattern to emerge to help recognize any peak in prices soon. I think a little patience will be necessary though. Then, I will advise on buying puts on gold related assets or shorting gold stocks.

I believe that based off of recent correlations that this peak in gold will correspond with a bottom in the stock market that should last several months and produce good price gains off the bottom.

I will be looking to make trades on GLD put options and SPY or QQQQ call options when I feel the market is ready to turn. I will keep you updated.


Pete

Update on Last Post- General Market Stuff

For those who read this consistently, I wanted to clarify and update a few things regarding my outlook and pass along some more information.


First, I don't think that this past week was the end of this bear market. In the last post I mentioned that I think we are near a major bottom in the markets though. In a bear market I would consider this to be a bottom that lasts several months and leads to a relatively large price advance (say....20-30%).


Now I wanted to pass along some information. I read a post on another site today looking at what has happened to markets in the past when they have had short-selling bans imposed by the government. The pattern that seemed to emerge was a severe sharp price gain followed by either some stagnation and then declines, or just gave way right to sharp declines from the end of the sharp price advance.


My thought for the last several months was that the market would go below the July lows, which it did. However, I had thought that this leg down would go deeper than it has so far. I was rethinking that after Thursday Friday (and still am to some degree), but the historical precedent of this type of situation now makes me think it is still possible, and probably somewhat likely that the market will go lower over the next several weeks yet.


Hopefully there will be another clear opportunity for me to recommend a short-term trade soon, so I will keep you posted.


Pete