New SSO Trade

I don't have time for more details, but refer to the last several posts about this trade.

Trade Recommendation:

Buy SSO before today's close.

Current price is 27.28.

Pete

Market Update - VIX and S&P 500

Click on Chart to Enlarge

Click on Chart to Enlarge

The top chart above is of the S&P 500 ETF (SPY) and is a daily chart. The bollinger bands overlay the chart and a MACD is plotted below. In past posts I have mentioned that I always look at gaps as points of significance. There is an unfilled gap up in SPY at around 84.00. Other than major breakaway gaps, most gaps will get filled relatively soon. This is one reason I expect price to come back down at least to 84.00. Also, despite a historic decline in the markets, there has not been a classic divergence of technical indicators indicating a bottom. A move to new lows will likely show technical divergence and set up a better market rally.

I think the most likely scenario is a quick move under 84.00, lasting 1-2 days and then a reversal. I will look to aggressively trade any reversal and recommend a trade on SSO which will profit approximately twice the amount of the general market averages.

There are many seasonal and historical statistics suggesting the potential for a big move up in stocks, but my opinion is that the market has not inflicted enough pain and confusion just yet to stage that rally.

The lower chart above is the VIX. This is a gauge of investor fear and willingness to over-pay for options, which are commonly used to protect stock portfolios. If the decline in stock holds today, the VIX will close above the 20 day moving average. The traditional target would be the upper bollinger band if this occurs. So, I will look for the VIX to move near its upper band and the S&P to move below its lower band. At that point, I will just be waiting for a classic reversal pattern.

Pete

Trade Set-ups

The last 2 days of big selling pushed the short-term model into clear oversold territory. However, there has been no significant reversal that gives indication that the recent selling pressure has hit a short-term climax. Additionally, the only real technical support underneath current prices is the October lows around 840 on the S&P 500.

I would be willing to suggest a trade on SSO if the October lows are violated and there is clear indication of intra-day reversal or a bullish candlestick formation. Ideally the short-term model would be oversold and divergent at that point, but oversold with signs of reversal would be good enough to make the trade.

Based off of all the information I consider in recommending these trades, I think the best way to play this market in the next few weeks is to assume rather high volatility, with little directional bias. I would give more weight to overbought conditions than oversold, because the "keep it simple stupid" principle tells me that the market trend is clearly down, and it makes best sense to trade overbought signals in a downtrend. The high volatility may indeed present good set-ups in both directions though.

Pete

NSC Technical Analysis

Click on Chart to Enlarge

The chart above is of NSC which is a railroad company, Norfolk Southern.

I bought a few Dec 55 put option contracts on this today. There are a number of things I wanted to point out on this chart for the interested technical analyst.....

Not visible on this chart is the long term trend. The stock was in a bull market for several years and the recent decline obviously broke the uptrend channel and the speed and size of the decline is greater than the bull market corrections on the way up. If you remember anything from this post, remember that last sentence.....that is typically the nail in coffin after a bull market. It is a clear shift in long term trend.

So, this particular stock has obviously topped, and the general markets are obviously in a bear market. So now we look for a good point at which to short the stock or to buy put options.

Now to the technical analysis.......

The stock is rising and is just under the 50 day moving average on this advance. That moving average is a key average that everyone watches and where smart money will look to short the stock on its first bear market rally.

Second the bollinger bands overlying the chart show that the stock has come up and touched the bands. The 3 standard deviation bands are not on the chart, but price actually touched those bands too. This provides a great area to look to short from a statistical point of view as those bands will contain over 95% of price action and a touch of the upper band in a downtrend is often a reversal point.

Also, look at the rate of change indicator above the chart. Despite a short advance, that line has hit peaks only seen a few times the last couple years. These ROC peaks in bull markets often mark short-term tops, and in bear markets I have seen this initial high momentum thrust after the first leg down be the top before massive declines in the next leg down.

Underneath the chart is a fast stochastic chart showing the fast stochastic line is overbought. In bull markets I don't follow that line much, but in bear markets an overbought stochastic often immediately leads to weakness.

I don't use volume as a primary indicator, but when you see heavy volume declines, followed by overlapping upward prices on declining volume, that is hallmark for a corrective advance rather than new uptrend.

Today also formed a bearish engulfing pattern, though on low volume. But still, that rejection of higher prices is another clue that sellers are there to jump on this.

To sum up, I think this is a stellar opportunity to make a bearish trade on NSC. I am not going to track this on the blog, but for a swing style trader, I would view 63.00 as a stop loss and if stopped out look for the next bearish candle stick to re-enter. For someone who is willing to give some wiggle room on this stock, I think that the 69.00 is unlikely to be approached before another large decline in the stock.

Pete

SSO Trade Exit

Despite the last few days not triggering a true obvious extreme in the short-term model I use for timing these trades, I am suggesting an exit.

The first reason is based off the indicator itself in that it was a hair's width from overbought a few days ago, and then prices eased and started making new highs but without the indicator making more highs. This is a classic technical type of divergence, and I have seen that divergence is useful in this indicator as well.

The next reason is that the election tomorrow is a wild card, and at this junction I don't have a clear indication of what way stocks are likely to move in either scenario.

So, while I typically will not deviate much from the indicator signals in recommendations here, I am going to post the exit at the current price on SSO which is 32.20.

This is another nice gain of 13.5% up from 28.37 at entry on Oct. 23rd. Selective timing using this model has continued to give outstanding results.

Pete

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