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