Stock Jockz

Testing Phase 1 complete

2011-04-20T14:47:00.001-07:00

48 trades and 2 months later, I think I have completed the 1st phase of my testing this strategy.

Key highlights:

1.37% gain

average risk of only .49%

max drawdown was 2.65% which is probably my worst stat. But it was not because of any one losing trade - I had a series of 6/7 trades that lost in a row.

Also, I paid more than 2% of my account in commissions... is TOS too expensive? You bet!!

In any case, I am fairly satisfied with the results. I know that 2 things must change: my MFE to exit efficiency is a mere 33%. That means I am not capturing the max profit possible. So I am moving my far out target a little closer.

Also, I am getting stopped out way too much on trades that go on to win and win big. So I need to optimize my stop loss a little bit.

Apart from that, I can see, as I thought, around 60% of my trades will be profitable.

A note on the markets

In case you did not know, I am only simulating the above strategy. I am making decent profits trading this strategy on a daily basis. Mostly, I have been lucky and caught both the big down moves on S&P and exited very near the bottom.

My Excel Journal

2011-03-15T12:12:00.000-07:00

Since March 11th, I have not had a chance to post everyday, but I traded three new trades in that time.
Nothing too exciting happened though. One loss, one breakeven, and one gain. One thing I noticed though, while I was not logging my trades, I was starting to really doubt myself and think "this is not working, I am not making any money, bla bla bla. I should revise my strategy" Actually, I even traded one trade going completely against my strategy (ended up in break even).

But as I sat down today to log all the trades, I noticed that my account position overall changed a mere ~.1% after commissions!! And, clearly I have not been losing - only 1 of the three trades resulted in a loss (and had i followed my method, two would have been wins rather than 1 breakeven). I thought it was very interesting to realize that just the simple act of not logging trades and going into the weekend had me thinking and going off on bad tangents.

Anyway, instead of posting all the trades I logged, I want to share my journal. The format is very similar to Big Mike's journal but I have changed a bunch of things to suit my needs. The data is very limited so some of the stats are a bit skewy (I only wish i was making 76%/year :D ).

Trades on 3/9/2011

2011-03-09T13:17:00.000-08:00

3/9/2011 Trade 1:

Trade Details:
Long 2 ES contracts at 1319.5
Stop loss 1.25 - 5 ticks- below entry price at 1318.25

Strategy:
If price reaches 1320.5 - 4 ticks - move the stop loss to BE + 1 tick.
Target 1: 1321.25 - 7 ticks - sell 1 contract and set stop loss to 1321.25
Target 2: 1324.25 - 19 ticks - set trailing stop of 5 ticks

Outcome: Stopped out at initial Stop Loss. No biggie.

Exit1-MFE efficiency: 0%
Exit 1- Risk efficiency: -100.00%
MAE: 1
Exit 1 price: 1318.25
Exit 1 Profit: -139

3/9/2011 Trade 2:

Trade Details:
Long 2 ES contracts at 1315.75
Stop loss 2.25 - 9 ticks- below entry price at 1313.5

Strategy:
If price reaches 1317.75 - 8 ticks - move the stop loss to BE + 1 tick.
Target 1: 1319.75 - 16 ticks - sell 1 contract and set stop loss to 1319.75
Target 2: 1325.75 - 40 ticks - set trailing stop of 5 ticks

Outcome:
I am a moron! I accidently put in the wrong order and got out of the trade for 1 contract. Then I did not know what to do with the other contract (lacking a plan!), I put a trailing stop, got stopped out, then saw ES advance 10-15 ticks AFTER TWO YEARS YOU WOULD THINK I CAN PUT IN AN ORDER CORRECTLY!!!!
I would be the idiot who puts a "B" instead of an "M" and causes the next flash crash....

Exit1-MFE efficiency: 100% (obviously this stat is incorrect because MFE was much higher, but the way my journal records it, this showed up. Once I adjust the stats for benchmark, this number will be fixed)
Exit 1- Risk efficiency: 50.00%
MAE: 9
Exit 1 price: 1318
Exit 1 Profit: 105.5

Exit 2-MFE efficiency: 55.56%
Exit 2- Risk efficiency: 27.78%
MAE: 9
Exit 2 price: 1317
Exit 2 Profit: 55.5

Finally Starting a New Year with a New Strategy

2011-03-08T15:22:00.000-08:00

I can't believe last time I posted was way back in September.
Anyway, it is a new year and time for a new beginning. I have spent the last few months testing and coding the TD indicators in Ninjascript and I think I have finally optimized it to something I can trade consistently. There are some more issues I need to work out but those will be resolved in due time.

A Change in Instrument
I am adopting a new trading style and strategy starting this year. For one, I will move away from options. Reasons:
1. The bid/ask spread is too much on everything but SPY and QQQQ. Even then, a 3-tick bid/ask spread means that any trade I make, I am in the hole $6 right awy including comissions. So I have to wait 6 ticks before I can show any profit. My trading style generally means I trade for only 10-20 ticks. aka up to 60% of my trade goes into just moving into profit. Terrible news for me.
2. Options often take on their own properties and deviate from the models and behaviors of the underlying. Since I chart the underlying, it does not make sense for me to trade the option while looking at the underlying security.
3. Too much hassle and calculations.

Also, I need to be able to trade off hours because of my job, etc.

So what do I trade? FUTURES!!! Woo hoo, join the bandwagon!!! But I can see why the futures market is so immensly popular:
1: bid/ask spread on ES, for example, is usually only 1 tick. Inlduing commissions and all, 2 ticks later I am in profit zone. Much more suitable to my trading style.
2: Futures, although do take on properties themselves, are generally easier to manage.

Defined Strategy
Strategy is simple: When I hit a 9 on a TD setup or a 13 on TD, and my composite index is also showing momentum in that direction (MA is above/below the actual value) I trade that direction, with clear targets and stop losses.

max loss per trade:$400 (so any trade with a stop loss exceeding that, I cannot trade).

Long term goals
Well besides the obvious: make a ton of money, I want to ultimately automate my strategy. In order to do so, I am tracking some key statistics that will help me refine my strategy. You will see these stats pop up in my future posts.
I also need to stick to the rules much more strictly this time around. For every trade, I am recording whether I followed the rule or not. Saying "Did not follow rules" almost reminds me of my elementry school teachers and imposes a sense of discipline that I cannot put on myself (growing up in India is tough!).

So, let us enjoy the ride:

First 3 trades:
3/7/2011
Trade details:

Long 2 ES contracts at $1307.25
Stop loss $4.50 (18 tickst) below entry price at 1302.75

Strategy:
If price reaches 1308.25 (4 ticks), move the stop loss to BE + 1 tick.
Target 1: $1311.50 (17 ticks) - Sell 1 contract and set trailing stop of 10 ticks
Target 2: $1322.75 (62 ticks) - set trailing stop of 5 ticks

Outcome:
Rules were followed.
MAE: 2.75.
Exit price for both contracts: 1307.25
Commission: $14
Profit: $(14)

Reflections:

All rules were followed. Looking at this trade the Risk/Reward ratio sucks. I calculate profit targets and stop loss based on fib ratios of the previous move. I should calculate the ticks of the ratios and apply them to the entry price (as I did with stop loss). Otherwise, I move the stop loss to BE after moving a mere 4 ticks.

Had I done the above, I would have waited 14 ticks (as opposed to 4) to move my stop loss to BE and all profit targets would have been 10 ticks higher.

3/8/2011
#1:

Saw a sequential set up along with the oscillator crossing over on both the 15 and 5 minute charts. I was a little late in getting into the trade because... well because I was not paying attention.

anyway here are the details:
Long 2 ES contracts at $1310
Stop loss $2.00 (8 ticks) below entry price at 1308

Strategy:
If price reaches 1312 (4 ticks), move the stop loss to BE + 1 tick.
Target 1: $1314 (12 ticks) - Sell 1 contract and set stop loss to 1312.
Target 2: $1319 (36 ticks) - set trailing stop of 5 ticks
Outcome:
Exit 1 rules were followed. Price moved to target and 1 contract was sold.
Exit1-MFE efficiency: 40%
Exit 1- Risk efficiency: 88%
MAE: 1.
Exit 1 price: 1313.50
Exit 1 Profit: $161

Exit 2 rules were broken slightly. I noticed that the contract reached a resistance level and was having a tough time breaking it. So I decided to set the trailing stop earlier and got stopped out.
Exit2-MFE efficiency: 80%
Exit 2- Risk efficiency: 175%
MAE: 1
Exit 2 price: 1317
Exit 2 Profit: $347

Reflections:
Had I not prematurely activated the trailing stop, I would have probably doubled my profit so should have stuck to plan...
on another note, I should start tracking Bench statistics to see exactly how much I missed out on.

3/8/2011 Trade 2:

A sell setup completed with falling osciallator lines. Additionally setup complete on 15 minute chart as well. I was expecting a big drop. Did not happen but I did make a small profit

Trade Details:
Short 2 ES contracts at $1324.25
Stop loss $2.00 (8 ticks) above entry price at 1326.25

Strategy:
If price reaches 1323.25 (4 ticks), move the stop loss to BE + 1 tick.
Target 1: $1321.25 (12 ticks) - Sell 1 contract and set stop loss to 1323.25.
Target 2: $1316.25 (36 ticks) - set trailing stop of 5 ticks

Outcome:
Exit 1 rules were followed. Price around 10 ticks then started retracing. A setup was completed in opposite direction so an immediate buy order was placed.
Exit1-MFE efficiency: 50%

Exit 1- Risk efficiency: 63%
MAE: 1.
Exit 1 price: 1323
Exit 1 Profit: $49

Reflections:
All rules were followed. Although the trade did not work out as planned, I feel pretty good about it since I followed the rules.

Strategy definition

2011-03-03T09:49:00.000-08:00

September Slump

2010-10-06T12:25:00.000-07:00

Real Account
September is historically a month when the stock market takes a hit. Unfortunately (for me) this September defied history and S&P500 climbed steadily more than 100 points. Unfortunately, this coincided with the time when I stopped paying close attention to the market and ended up taking some hits. As I look back, I can see that all my signals were there and had I followed my trading system, I would have profitted even though my bearish outlook was incorrect.

Oh well, lessons learned. For now, I have a lot of cash just because I am unsure as to what the market is doing. We broke the 1145 resistance I had been holding on to but my indicators are not giving bullish signals yet. The shorter term charts are bearish while the longer term ones are bullish/consolidating. See the chart below. An interesting point to watch for is the fact that the downward and upwards channels have created a confluence zone right above the current price. I think the market is going to test these trend lines and whichever side the price breaks to is the side to bet on.

Virtual Account
Since I am not a full time trader, keeping up with the signals spit out by my heat map was overwhelming. At one point I was up nearly 10% on the account (of $100,000) in a matter of 2-3 days but because I was unable to liquidate when the signals showed up(due to negligence), I did not capture the profits and now I am down 7%. Clearly, I need to either dedicate all my time to this or develop some sort of automatic trading system.

So, that is my next project. I have already refine the program to spit out buy/sell signals instead of TD studies' counts. The program needs some refinement and then eventually I am going to set it up so it can put through automatic buy/sell orders.

-Wown
stockjockz.blogspot.com

Market Update

2010-09-23T14:47:00.000-07:00

Real Account
SP500 reached a high of 1147, a fibonacci level I had identified previously, and closed 25 points lower today. I missed that boat until this morning. But I do believe we are headed lower. My last two trades have been closed for small losses because the reversal I predicted did not come. The signs are all there, I think it is just a matter of time.

Virtual Account
Using the heat map, I identified a few opportunities last week. I shorted JOYG, BIIB, and VZ last week. VZ and JOYG got stopped out for a loss while BIIB is still an open position.

This week, JOYG remains as a possible sell position. Additionally, GILD is an excellent sell candidate. Also on the sell watchlist are:
AAPL
CHRW
DD
AMZN

No buy prospects this week, again.

-wown
Stockjockz.blogspot.com

Trade Update and Heat Map Update

2010-09-13T15:05:00.001-07:00

Trade Update
In my previous post I said I was expecting a reversal on 9/7. On 9/8, SPX fell aroudn $11. But over the next couple of days, SPX rose, broke the 1104 resistance and closed today at 1121.90. Luckily, I closed out most on my position on 9/8 and closed the entire position out for around 15% profit.

As far as what's next, I think this is a fake break out and we are still due for a reversal of some significance. Reason being that we created a double top today just below 1125, another resistance level I have stressed in the past. Additionally, all my indicators are showing bearish signs. I think we might ahve an up day tomorrow before selling off for the rest of the week. However, I am waiting for a confirmation (on either side) before making any bets. I will keep you posted.

Heat Map
After many months of delay, bug fixing, errors, and frustration, the heat map is FINALLY complete in its entirety and ready to use. I have been testing this version for a week on the DOW 30 and NASDAQ 100 and have not seen any errors as yet.

Note: if you are unfamiliar with TD studies, I suggest a google search on TD setup, TD combo, and TD sequential before reading on.

This version features:
1. An accurate TD Setup Buy/Sell counts
2. Accurate TD Sequential counts (With an option to make aggresive counts)
3. Accurate TD Combo counts
4. TD Support and Resistance levels (when 0, it is N/A)
5. Count refresh on market close each day (so, unfortunately, it cannot be used for intraday trading. Perhaps the next version will include this feature).

I plan to test a trading system using this heat map by setting up a virtual account of $100,000. Every day (or as much as I can :) ) at market close, I am going to filter the table for those stocks hitting one of the following criterion:
1. 9 or more on Buy/Sell Setup
2. 12 (only because I am noticing that often price reverses at 12 rather than 13) or 13 count for sequential.
3. 12 (only because I am noticing that often price reverses at 12 rather than 13) or 13 count for combo.

I will analyze any of the stocks hitting TWO of the above criterion (within a 5 bars of each other) and see if the stock is at a Fibonacci convergence level.

If, so, I will, trade ATM options (in the direction that the study predicts) for a position size nearest to $5000, setting a stop loss of $1000 (or above Fibonacci level, whichever is less) and target of the support/resistance as stated by the heat map.

My exit strategy will be to sell 50% of my position when we reach 50% of the way to the target and move stop loss to breakeven for the rest of the position. Otherwise, sell another 30% at target and set a trailstop of 5% (on the option) for the rest of the 20%.

At any given time, I will hold no more than 5 put and 5 call positions and no more than $20,000 invested.

Be on a lookout for a weekly update of what stocks are on my watchlist that week and a summary of last week's performance. I have a strong feeling that the system will work well - if not at least I don't loose anything. Today's update is below:

No immediate trades but the following could be potential Put trade opportunities:
1. QCOM: 7 on Setup and 11 on Combo mixed with a declining oscillator right around an important Fibonacci level makes buying puts on QCOM quite attractive. However, we did recently break downward Fib. channel meaning that this could simply be a small retracement.

2. VZ: Similar situation as QCOM.

3. BIDU: Approaching the top of a channel that BIDU has been adhering to for a while now.

4. BIIB: Hit 13 almost in junction with a setup completion after a lot failed perfection attempts at completing the sequence.

-Wown
stockjockz.blogspot.com

My Views on Trading Implied Volatility vs. Price

2010-09-08T09:00:00.000-07:00

In my previous post I mentioned that I no longer want to trade IV because:
a) I am not as good at trading IV.
b) When you trade IV, you are essentially trading price so keep things simple and trade price.

Below is a more technical explanation of the above two statements.

Conversation on InformedTrades.com

I post a copy of this blog on InformedTrades. The following conversation took place between myself and another user (Forexer) on InformedTrades:

Forexer:

Here you about volatility. You think volatility follows the normal distribution? Price doesn't. Price is lognormal. They have skews very frequently and that is exactly what makes them tradable. I rather sell volatility than buy them because high IV usually erodes slowly at the least or maybe revert back to the mean. We can use statistics in trading volatility to a great extent. But we know its not all about volatility

Me:

Volatility is supposed to follow a normal distribution from what I understand. Reason being that the means of multiple lognormal distribution should be normally distributed. Since the means of the multiple lognormal distribution is basically what volatility is, we should conclude that volatility is normally distributed (correct me if I am wrong - been a while since I studied option theory).

But like price, I would argue volatility too should be lognormal because although volatility is supposed to measure the increase in price movement, [implied] volatility rises when price falls and vice versa. So IV really isn't measuring the variation in price but rather the market's belief or reaction to negative price movement. So, since price distribution can be skewed and volatility is simply the reaction to price movement, it too should be skewed.

Which brings me to my original point: if you trade IV's, you must take into account the fact that negative price movement will raise IV. So, you should long IV when you expect price to decline and vice versa. But why would you go into such complicated calculations when you could simply trade the price in the first place.

Hope all of that makes sense

Let me explain that a little bit. A lognormal distribution looks like the graph below:

Source: danvk.org

The reason for this lognormal distribution is quite intuitive. The price can never fall below zero so the lower limit is set at zero. The upper limit is infinity however realistically speaking the price will be centered around the mean (which in this case is around 75).

However, different set of price data for the same security can have a different lognormal distributions. The difference in this variation arises from variations in the mean and the standard deviations. For example (only illustrative), in the month of August, SPY could have a mean of 110 with a standard deviation of 10. In August, however, the average was 105 with a standard deviation of 20. These two data sets would yield two different lognormal shapes. This is illustrated in the graph below:

Theoretically, the means (averages) of all these lognormal distributions will have a normal distribution. In other words, if you created a data set of the means of all of the lognormal price distributions of a security and plotted it, the distribution would resemble the below:

Theoretically, this normal distribution is the volatility of the stock. But all of this seems counterintuitive to me. For one, remember that a normal distribution does not have a lower limit. So essentially you are allowing for negative prices - even if the chances are one in a billion. Additionally, and this is simply speaking for experience, IV tends to fall a lot slower than rise and this is clearly not represented in a normal distribution. Thus, there is a BIG disconnect in what IV actually is vs. what it theoretically is.

In my mind, IV is simply another way to say what the option's price is - which itself is simply a derivative of time value and underlying's price. Theoretically IV is supposed to imply how much the market believes the stock will move by expiration, but in truth, I believe it simply says "how afraid are people that stock will fall". The more afraid they are, the higher the IV (yes, even the call IVs - although this is often overlooked simply because the falling price deteriorates the price of calls).

Continuining with the coversation from above:
Forexer

Yea. Hats off to you. I'm not a math guy but i hear you on the IV being lognormal. Does IV increase on large updays?

Short answer: No. If anything IV falls on large updays. Take a look at the chart below of the SPY:

The chart shows SPY price plotted with average implied volatility. Granted this is not a very thorough study of IV vs. Price, but you can clearly see:
a) IV rises a lot quicker than it falls.
b) Price and IV are negatively correlated (When price rises, IV falls and vice versa). Notice the price vs. IV from Feb to May and then again from late June to August.

-Wown
stockjockz.blogspot.com

Another Reversal

2010-09-07T06:46:00.001-07:00

First week of September saw a nice rally in the markets and thankfully I was able to ride most of that move up. In fact, a friend of mine asked me "A lot of financial journals are claiming that a big sell off is coming. Should I short?" I answered "Yes, but only if SPX breaks the support at 1040". That day SPX went to 1039.88 and rallied. A couple of days later SPX went to 1039.35 and rallied all the way to 1010.

Meanwhile TOS updated its software and in the process all my charts were erased. So for a while there I was trading on gut instinct because TOS support claimed that the charts would be available soon.

On Friday I finally contacted TOS support and asked them the status. Turns out you can reverse an update and that is exactly what I did. When I got my beloved charts back I saw that SPX was trading just below 1105 resistance I had found a while ago. Not only that but the Demark countdown and setup hit 13 and 9 respectively. I quickly liquidated my long calls and now I am sitting on a put vertical. I expect the price to drop to at least 1080. However, I may be inclined to cash in the profits (currently at 4%) if the oscillator breaks the downward trend (see red line).

In other news, I am going to try increasing my position sizes. My performance and price reversal predicitions have been very accurate lately and I believe it is because I have finally found a combination of fibonacci trading techniques and indicators that work. So, feeling more confident, I am going to increase my risk apetite. Also, most of my trades have some sort of an 'insurance' policy now where even if I am wrong, I have a counter trade that at least helps me break very close to even. Of course, I am still keeping my positions and max loss at around only 4% of my account.

Finally, I have been considering what has helped me perform better lately (Compared to 8 months ago when I was down 20% of my account). First, I am not trading news anymore. By the time retail traders get wind of the news and act on it, it is almost always too late. It is also no use trying to predit the news because again, if you are making a prediction, you can bet a lot of others are as well and acting upon it.

Secondly, I have been sticking very strictly to my trade plans - taking emotion completely out of the picture. It is tough watching your trade take a 50% hit and having the patience to let it play out. I think I have finally managed to learn that lesson.

Finally, I realize that I am terrible volatility trader. Many experts out there claim that if you trade options you must trade the implied volatility. Also, they claim that since volatility usually operates within a given range, it is easier to predict. I say all of that is a bunch of crap. You have to know the direction of the move unless you are 100% delta neutral (Which is theoretical anyway) all the time. Maintining neutrality alone costs a fortune in commissions.

Additionally, and maybe this is just me, predicting volatility is just as hard, if not harder, than predicting price direction. Reason being that IV is a derived mathematical and theoretical number to which you cannot assign technical studies. So, I feel people are better off just taking advantage of the leverage properties of options to trade the underlying.

-Wown
stockjockz.blogspot.com

Revisiting Old Friends: Told You So

2010-08-06T06:12:00.001-07:00

I woke up and while I was eating breakfast, saw that the S&P500 futures were up around $2.25. I made a note saying "Sell long puts from the diagonal" thinking we broke 1125. I figured I would take a small loss right now and by August expiry I will have made a little profit from the short puts in my put diagonal (see Revisiting Old Friends).

I got to work and checked the futures and to my surprise, the futures are now DOWN $10!

All I say is "Told you so" and scratch my note.

-Wown
stockjockz.blogspot.com

Revisiting Old Friends

2010-08-04T13:37:00.001-07:00

In my previous posts I have stressed the importance of the SPX price levels at 1104 and 1125.72. Time and again since November 2009 we have come to these price levels and seen resistance. The market closed today at 1127.74 - just above the higher of the two levels mentioned. We tried this level back in June (note also that this area served as intermediate support in May) and failed to breach it. Will be make a run to the upside this time after beating 1125?

Who knows - all I can say is that we will probably make a sizeable move one way or the other and so I am setting up for a trade to capitalize on that.

A couple of interesting points on this chart:

Firstly, notice how well the chart has followed the blue fibonacci channel. I drew this channel back on July 19th. The accuracy of the support and resistance points is uncanny - still amazes me. Anyway, the point is that I see the market trying to break the resistance but really not able to do so - giving a bearish indication.
Do not forget, however, that this is an upward sloping channel thus indicating that we are in a bull trend (on the 15 minute chart at least) and we may simply be in for a correction before a rally (or perhaps the correction already occured and once we break the resistance its a bull-run!).

There have been multiple sell signals on the DeMark indicators. Additionally, the top of market failed to reach the top of the channel, indicating that the market may be contracting. Again these are bearish signals.

The same chart on a daily time frame shows an even bearish picture. Firstly, please excuse the light gray channel on the chart - it is the channel as shown in the chart above. I would have liked to simply hide that channel but TOS will not let me hide a single channel.

Getting back on track, you can see that 1125 has held its resistance for three days and now we have approached the top most leg of the downward sloping channel. IF we were to break this channel and break the 1125.75, it would be a very bullish signal. However, seeing as how the EW pattern seems to have played out in a perfect 1-2-3-4-5 and that the oscillator has been trending downwards while the market is rallying, I have serious doubts that we can break this resistance without more buying pressure.

When I started writing this post, I felt I had a neutral outlook on the market. However, I sound very bearish in this post. Originally, I was going to trade a straddle with as high (least negative) a theta as possible. Instead I think I will go with a put diagonal (I believe that is now my most frequent trade). If we break 1125 and the channel top, at least I can sit on short puts until they expire.

The Heat Map/TD studies filter
I have had a couple of questions on the update for the heat map/TD studies filter I have been working on. Unfortunately, I have not had the chance to work on that at all. Suffice to say that one point I had everything working but then realized it was quite buggy. I am still trying (well not really at this moment, but soon will try to) figure out the cause of the bug.

-Wown
stockjockz.blogspot.com

Market Commentary 6/29/2010

2010-06-29T09:58:00.000-07:00

In my previous posts I mentioned that SPX would reach 1104 and then turn around. I also said that if the move was confirmed on the daily charts, I would take a short position on the SPX.

I did just that - bought a Put diagonal when SPX was trading at around 1094 (see chart - the blue circle). Of course since then we dropped significantly and bounced off the 1040 area that I said would prove to be the support. Not surprisngly, the sequential hit 13 today on the 15 minute chart.

However, the trend is still very much bearish. Look at the fibonacci channels in the chart - it shows the market is still very much within the bounds of the channel and the lines have not broken.

Keeping this in mind, I sold half my diagonal, capturing ~21% profit. I am now sitting on a diagonal with very high theta. If the price consolidates or continues falling, I anticipate making ~40% profit. Meanwhile, I am keeping an eye on the daily oscillator and setup count (Which has reached 7 already). If that turns bullish, I will tighten my stop loss and exit the entire position.

Additionally, take a look at the table below. In ninjatrader, I finally have setup working to perfection. Sequential and Combo studies are nearly there as well, just needs some tweaking.

The colors really help you see when the trend is reaching exhaustion. For example, notice that most stocks are showing up as green while only a couple are red. This means that the bear trend may be ending soon. I can also filter the table so that I only see stocks that hit a 8/9 yesterday.

-Wown
stockjockz.blogspot.com

Feels good to be right!

2010-06-22T13:35:00.000-07:00

In my previous post:

The new retracements and expansions confirmed the 1104 level. I found a new confluence zone at 1125 area that could prove to be stiff resistance.

The SPX topped at 1131.72 (a mere 6 points off) and fell around 3% in a matter of a day and a half. Not only did we have a fairly dramatic sell off, but we closed today below the 1104 support that I have been stressing.

As far as trading strategy, I have been taking small profits along the way down but the sell off occurred so quickly I did not find a good entry point. Moving forward, I am going to wait on a confirmation of the 1104 breakout to the botton on the daily chart. I think we could rebound a little tomorrow and test the 1104 area before moving downwards again. If this occurs, I will take a large short position with a price target of 1040 and a stop loss at 1125.

-Wown
Stockjockz.blogspot.com

1104 the support now?

2010-06-17T10:19:00.001-07:00

The SPX finally broke and has maintained the 1104 resistance on a closing basis. As I mentioned in my earlier post, I thought that if this event occurred it would herald a resumption of the bull trend.

However, today I suprised myself at how much my perspective changed in just a couple of added days on the same chart:

Firstly, the two days that we registered (keep in mind today is not over yet) above 1104 have both been down days. This indicates that the breakout is fake and we could reverse yet. Secondly, notice that the TD setup has reached 6 meaning that the potential bull rally is over in 3 days. Third, the oscillator has reached overbought territory further indicating an exhaustion of the bull run.

So I decided to pull one of the older tools in my arsenal: Fibonacci levels. I have not used these for a while. My first observation came as no surprise: the new retracements and expansions confirmed the 1104 level. I found a new confluence zone at 1125 area that could prove to be stiff resistance.

Finally, my monthly oscillator is taking a dive from the overbought area indicating that this may be simply a correction in a much larger bear trend.

So here is my hypothesis: we will continue to rally to around 1125 area and then go right back down. I think I will wait for the confirmation of this move to come around before I make any major trades.

In the meantime, I think I may switch brokers to Tradestation. Their platform allows for much better custom studies and more importantly much better screens. Not to mention their commission rates are lower. My only concern is the whopping 7% margin interest rate which would be a pain.

-Wown
stockjockz.blogspot.com

Retested 1104 and failed

2010-06-14T10:14:00.000-07:00

Today I thought we might break the 1104.7 resistance for the S&P500. There was a break on the daily downward trend (blue line) that has been holding up for quite a while now. Early afternoon today we also broke the 1104.7 resistance I have been stressing for a while and I ALMOST took a long position on the S&P500 (I have liquidated by short positions I mentioned in my earlier post).

Instead, I shorted the market and took a small profit as the market retraced. However, I am out of that position as well because I think we can still break the resistance. Already the selling pressure is abating and as I am typing my oscillator is turning positive. I think that during this week we can see a confirmed break out above 1104.7 but it could come after a couple days of consolidation around that level.

My GS short calls and SPY short puts are nearing expiry, both OTM. The SPY is a near guarantee while GS still has around 3% chance of going ITM. I am reading The Black Swan at the moment and so I believe the 3% is definitely a risk. I am considering getting out of that position, especially if the SPX breaks 1104.7. I have already made a 95% profit on that trade and now I am just being greedy.

- Wown
stockjockz.blogspot.com

Short on the market

2010-06-02T11:36:00.000-07:00

This is my first post in nearly a month. As usualy, I have been very busy but have been keeping track of the markets.

I believe for the moment we are in a bear trend and even as today we are up ~1.60%, I think we can expect a few more weeks of sidways or downward movements. I am watching the resistance levels established by the market (S&P 500) at 1218, at 1170, at 1107 during the up swing from Feb to April. Since mid-April, when we started going downwards, the market rebounds, hits or approaches these levels and falls down again.

So, keeping that in mind, I am short on SPY. The only 2 things on my books right now are:
1. Short calls on GS at 170 expiring in July
2. A put 101/108 June/Sep diagonal (got very high premiums for the 101 puts so worst case scenario I get stopped out for the Sept puts and still make profit).

Still working on that spreadsheet, although slowly. The more I read about the study the harder it gets to program the damn thing...

-Wown
stockjockz.blogspot.com

What a week!

2010-05-09T11:47:00.001-07:00

Wow, once in a lifetime kind of a week. Unfortunately I did not fare well through the roller coaster.

I was very busy with work so even though my indicators started showing bearish signs on Friday 4/30 and also Monday, I did not set adequate stop losses and took some pretty big losses on Tuesday. I thankfully managed to get out of a lot of my positions by the time the big "crash" hit. But I still had some long positions and as it happened, I was driving around and internet-less that day.

As things started going bad, my buddy was texting me the dramatically falling prices. One text simply said "its a crash. down 900" and this triggered a panic attack for me. I was sitting in a car FREAKING out thinking "Oh my god! I may have just lost everything!".

Luckily the market came back and I had short positions on GS and QQQQ so my losses that day were not that great. What really took me out was a case of the fat finger on Friday. I was watching the markets and mid day Apple showed bullish indications. So I decided to take a long position by buying ONE call option. Accidentally, however, I bought TEN calls. So, I said "that is fine, I think it is going up".

And Lo and Behold, Apple rises ~$3! Jubilant, I check my position and see that I am DOWN ~$2000. Thinking that there must be widespread falling IV's because of the rise and the delta effect has not kicked in yet, I hold on to my position. My losses just keep going up, however. At -$2100 I realized I had bought TEN PUTS instead of ONE CALL!

As a result, I have now decided to take a break. I need to develop a more solid trading plan and always set firm stops.

I am working on using TD indicators. Below is a screenshot of a spreadsheet I am developing:

The spreadsheet can download 10 years' historic data for the stocks listed on the left. It then calculates TD Setup numbers on daily, weekly, and monthly charts. I plan to add TD Sequential and Combo as well to the table and finally add PLDot numbers.

I can then use this as a screen to find stocks breaking trends on the PLDot and combo completion.

-Wown
stockjockz.blogspot.com

Chart Series: BIK

2010-04-21T12:42:00.001-07:00

Comments
I bought BIK thinking of it as a long time investment (5 years or so). But I have lost around 10% on this investment so I went out of it. I still think fundamentally the BRIC sector has a lot of potential over the next 5-10 years (although there are concerns about China showing signs of slowing down and letting the yuan float which could hurt chinese stocks).

So I went back and looked at the index technically and realized I bought it at the top of a correction (d'oh, should have checked techincals before buying!). BIK is in a bear trend at the moment daily, moving sideways on the weekly, but on the monthly if we can close above the PLDot, a new bull trend will be established. If the weekly and the daily charts can follow up (which needs to happen anyway for the bull trend on the monthly to occur), I will buy back into BIK.

Also, I am keeping a close watch on the composite oscillator, looking for signs of reversal. I think the oscillator has reached about as low as it will go so should turn around soon. We are reaching a very key support at 24.7 which could very well be the turning point.

Chart Series: DIS

2010-04-20T11:12:00.000-07:00

Comments
I bought DIS as a long term investment a while ago and the bullish trend has continued for a while. The stock, on the daily chart, is consolidating pre-earnings but is still showing support not far below the current price. My target is around $43 for DIS because of the bullish signals on the weekly and monthly charts.
Not to mention I think the FIFA world cup and acquiring the Marvel franchise helps disney fundamentally quite a bit.

My Trade (Investment)
long 300 shares of DIS.

Chart Series: TLB

2010-04-20T07:32:00.001-07:00

Comments
A strong bullish trend on both weekly and monthly charts suggest the TLB is going to climb upwards. Although there are some bullish signs on the daily chart, I think any bullish move will be short lived because from an EW perspective I think we are in the middle of or end of a wave 1 (which would mean a wave 2 could pull back the gains a bit, but not below $11).
There is very strong support near $12.80 and both, PLDot weekly and daily support are above this level.

My TLB Trade:
Short 12.5 Aug Puts.

Charts Series: AAPL

2010-04-20T06:52:00.001-07:00

I am going to post the charts I have created for all the stuff on my books, starting with Apple.

Comments:
In the short term Apple is looking bearish as the PLdot trend is broken (price closed below the PLDot line yesterday followed by an opening on the down side today). Also the Composite index is looking bearish because of the divergence in the composite index tops.
Having said that, weekly and monthly charts are looking very positive - PLDot trend is very strong on both and the composite index is on a bullish run.
From an EW perspective, I think we are in the middle of a wave 3 or wave 5, depending on how you look at it. Thus it is possible the short term trend reversal will feed into the longer term trend reversal.
However, I think the reason for the consolidation in the short term chart is because of the earnings release on 4/20 (Today!). I think AAPL still has some ways to go further north, especially since the Monthly PLDot resistance and Fibonacci resistance is so high. Also, there is very strong PLDot and Fibonacci support in the 230 area, so I doubt AAPL, if it falls, will fall far.

My AAPL Trades:
May 240 Calls - left over from a straddle
230-220 Bull Put Vertical

Will post more charts.

-Wown
StockJockz.blogspot.com

A Few Updates

2010-04-16T11:37:00.000-07:00

I had described three trades: a DG bull put spread, an AAPL straddle, and a MSFT straddle. Below are my updates on the three trades.

DG Bull put

The trade worked out quite well. The earnings were somewhat disappointing and DG briefly gapped down. But the overall momentum of the market had the stock rebounding back up in no time and the combination of the positive deltas, high thetas, and dramatically falling implied volatility has made all the options worthless at this point and so I have achieved my maximum profit (unfortunately I am unable to get rid of the trade because there is no market for it. I guess I just have to let the options exprire in May).

Profit realized: 200% ($160) on cost and 8% on margin.

AAPL and MSFT Straddles
This trade is not going as well as I had hoped. My trade's premise was based on the theory that IV would rise. I think the IV was so much higher than HV that it could not go further up quickly enough to counter the negative theta.

The puts were doing especially bad because the stocks kept going upwards. So, I have traded the puts away for a small loss. However, the calls that I kept have been doing quite well. Because today is a down day, my current overall position on both trades is pretty much breaking even. Hopefully moving forward, the stocks make positive jump and I can realize profit on both these trades.

Additionally, I have been slacking off on my QQQQ analysis. I actually accidently ended up deleting my charts and I have just been too lazy to recreate them. One of these weekends I will get time to do that.

Finally, I have been REALLY slacking off on posting my month-to-month performance so I will try to get back on track with that:

Mar-April profit: 3.58%
Most of my profit comes from bull put spreads as I ride the rally higher. Today worries me quite a bit actually because I am down across the board and lost 2% today. Perhaps it is time to consider exiting some of my position prematurely because a correction may be on the way.
Biggest loser was actually one of my long-term investments in BRIC countries. So I am not too worried about that one.

-Wown
stockjockz.blogspot.com

2 Trades: MSFT and AAPL Straddles

2010-04-06T08:33:00.000-07:00

Trade:
Buy 6 MSFT Strike 30 May Calls and Puts.
Entire trade at 2.25/contract

Buy 1 AAPL Strike 240 May Calls and Puts.
Entire trade at 21.30/contract

Analysis:
Both these tech giants are announcing earnings on 4/21 and 4/22. The Average implied volatilities are dwindling 26% for MSFT and 31% for AAPL. This is much lower than the average for both companies and the reason may be the steady bull run both companies have enjoyed since last earning season.

However, already implied volatility is starting to creep back into the market as earnings approach - investors are protecting themselves against a possible reversal in the trend post-earnings.

Expecting to see the age-old phenomenon of rising implied volatility in pre-earnings weeks, I have traded the above strangles. My worry is that theta is somewhat high for May options, but June contracts were too expensive and did not present the desired vega values. Additionally, the historical volatilities are lower than the implied, suggesting the IV could fall lower or stay the same. Theta deterioration and a lack of increase in volatility could hurt me.

Profit/Loss Expectations and Trade Management:
If implied volatility rises a mere 5%, I will make ~$300 on both trades (which is approximately 22% on MSFT and 14% on AAPL). If this happens, I will exit the trade aroudn 4/19 in order to protect myself from falling implied volatility post-earnings.

Also, depending on the time frame, if AAPL or MSFT move ~6% in either direction, I can expect to make a profit (the probability of this is ~45% for both trades). If there is a significant breakout in either direction, I will sell the other leg and retain profits on the winning side.

The worst case scenario would be that both stocks move right to the strikes I traded and settle there along with falling implied volatility. If this happens, I will exit the trade a couple days after earnings announcement.

-Wown
Stockjockz.blogspot.com

Trade: DG bull put spread

2010-03-29T15:32:00.001-07:00

Trade:
Sell May 22.5 Puts - 8 contracts at .30 each
Buy May 20 Puts - 8 Conttracts at .15 each
Resulting in a bull put spread with a limit price of .15/contract.

Analysis:
Dollar General options are trading with an average implied volatilities of around 36%. That is 12% higher than the average 20-day and 30-day historical volatility. The reason for this spread is that DG is about to announce earnings in a couple of days. Once earnings are announced, I believe IV will drop significantly, devaluing the short puts.

From an EW perspective DG is beginning wave 3 up and if the earnings are positive, the wave could continue upwards for a while.

If my EW theory is wrong, I have found very strong Fibonacci support at $24.30 and at $23.9. I highly doubt that DG will be able to break both those support levels even if earnings are poor. That is why I have picked strikes well below those levels.

Profit/Loss Expectations:
If I hold this trade to expiration, I can expect to make approximately $96 or 5% on Margin requirements (after commission) in under 60 days. Annualized, that is approximately 40%. I will achieve this profit at any price above $22.50 and there is a 73% chance of this scenario.

If I hold the trade until expiration and the price closes below $20, I will have the maximum loss of $1880. There is a 10% chance of this scenario.

Trade Management Plan:
If the price breaks upwards or keeps movings sideways after the earnings announcement, I will sit back and let the options expire after 53 days.

If the price breaks downward and below $23.20 (just below another Fibonacci level), I will exit the position with ~$400 loss after waiting a couple of days to see if IV falls. If at anytime my overall loss reaches $800 (~stock price at 21.20), I will exit the position immediately.

-Wown
Stockjockz.blogspot.com

3/19 update QQQQ

2010-03-19T08:13:00.000-07:00

Sorry I have not been keeping up with the updates on QQQQ. Not much has been going on since the market has been moving sideways for a while. After breaking my target of 46.64, the market has been very slowly creeping upwards to my next target of 48.38. The oscillator on the hourly charts are showing a sharp reversal and the reversal is also reflected on the daily chart.

My reasoning is now that the original EW pattern I had drawn may have been wrong and I have discovered a couple of alternate patterns which could be developing. I still remain bearish on QQQQ in the short run, but now I am not sure about the long term trend - the bull market run may or may not be over.

Will post detailed analysis in a couple of weeks as I am very busy at the moment.

-Wown
stockjockz.blogspot.com

3/8 update on QQQQ

2010-03-08T17:19:00.000-08:00

Summary
After consolidating for a couple of days at my initial target of 45.57, the QQQQ has continued to climb higher. This has two significant impacts that I have described below as I explain the chart updates.

Before I get into that, I do want to simply summarize the below so that if you are Elliott Wave challenged, you do not have to read on. Basically, I very strongly believe that this move up is coming to an end and I still think the next support level of the down move is near 40.50.

Chart 1(hourly):
The hourly chart shows that wave 5 continued to climb up, contrary to what I had originally suspected. After reaching the top of the channel (black diagonal line), QQQQ moved along the channel, setting a price high of 46.64 (again). Now if you refer back to my earlier posts, you will notice that the second most likely target I had set for QQQQ was exactly 46.64 (as reflected in the daily chart below, chart 2). This fact, coupled with the major divergence I am seeing in the oscillator and the fact that volumes are declining further, strongly leads me to believe that wave 5 is more than likely over.
The only alternative is that wave could extend and continue upwards. I find this unlikely because of 2 reasons. Firstly, the 5th wave extended in the previous motive wave up (wave A green). Thus it is likely that the same will not happen again.
The second reason is explained below as it needs us to look at the daily chart.

Chart 2 (daily):

The second reason why I believe that wave 5 will not extend is because that would put wave C (green) above the previous top. This would imply that a running expanding triangle is developing as the correction and right now we are in wave B (blue).

Now I realize that such a thing is a possible. But it is very unlikely in this particular instance because wave A/1 (blue) was 5 waves down. This means that the most likely wave pattern that will develop is a Zig Zag or a triangle of some sort that is part of wave 1 down of a wave level higher than the blue waves. Now we can safely assume that this is not a zig zag because wave B/2 retraced all the way to market high, so the only alternative is the triangle option, and running expanding triangles are VERY rare, especially those with a 5-3-x-x-x pattern.

One could argue that this is a flat correction, but again, unlikely because wave A (blue) was 5 waves down, and flats usually have a 3-3-5 pattern.

I hope I have not lost you, and if I have, once again to summarize, I believe the target for QQQQ is near 40.50.

As a further update, I will try including time studies on future charts to have an idea of when these moves should be completed.

-Wown
stockjockz.blogspot.com

QQQQ update

2010-03-04T13:54:00.001-08:00

Chart 1: Hourly chart. I think 3 was an extension followed by a wave 4 that tried repeatedly to break the 3's top but failed, thus making a triangle. 2 reasons for believing 3 was an extension:
1) 5 was an extension in the previous wave up (wave 5 of A Green) and thus we can say because of alternation 3 should extend here.
2) wave 3's top would lie above my fibonacci confluence zone, implying that 3 became overextended. So a lengthy wave 4 correction followed which will be followed by a short wave 5.
Notice also the grey boxes. On the left side the market moved sideways while the oscillator fell. Then the oscillator reversed as wave 5 came about but very quickly after that QQQQ fell nearly a dollar. A very similar set up has been created on the right hand side as during wave 4 the oscillator has fallen significantly, today (during wave 5) the oscillator reverses. If the oscillator reverses AGAIN, you can be pretty confident that there will be a pretty big move down (And that is when I get in!)

Chart 2:

Two important things:
1) If I am wrong about the original 45.57 target and we do not get a reversal soon, the next target is 46.64 - not only because it is the previous top, but also is an important fibonacci confluence zone on the weekly charts (not shown).
2) Notice the steady decline in volume during the ABC (Green) wave. This signifies an exhaustion in this up move.

-Wown
stockjockz.blogspot.com

QQQQ analysis continued

2010-02-27T15:53:00.001-08:00

I have been learning Elliott Wave and how to combine Fibonacci and Elliott. Below are two charts of my first attempts at combining the two.

Chart 1: Hourly chart showing a 5 wave move up (in light blue) that is part of a larger Wave A (Green) followed by a 3 wave correction (light blue) that was part of a wave B (Green). Light blue waves are sub divided into pink waves where relevant.

Chart 2: Shows a 5 wave (green) down move that is part of wave 1 of a new downtrend (Which seems to be the most popular belief) or wave A of a correction of the bigger uptrend. Combining long-term and short-term fibonacci levels, I believe the most likely most for wave c (green) is to 45.57 area. The top of C (green) will either be the top of B (blue) or top of 2 (blue).

QQQQ Fibonacci analysis

2010-02-02T20:29:00.000-08:00

Here is a chart I made a couple of weeks ago practicing Fibonacci levels. I have left only the most important horizontal confluence zones.

Notice how cleanly QQQQ is bouncing off a VERY significant level (possibly the most important level in the entire chart - this level kept showing up as a confluence zone).

-Wown
StockJockz.blogspot.com

Update on AAPL

2010-02-02T10:32:00.001-08:00

As mentioned in my previous post, I bought a put diagonal believing AAPL will decline in the coming days. This post is an update as to what happened.

After I bought the put diagonal, AAPL released earnings the next day. This had two effects:
1) I got stopped out of my long puts around the red rectangle for a pretty significant loss on the long put side.
2) The drop in volatility, however, made me pretty good profits on the short put side.

At that point I was expecting AAPL to continue to rise and so I kept the short puts and expected them to expire OTM, which would have resulted in ~80% profit.

But, AAPL quickly reversed and after consolidating a little bit at the support levels I had drawn, it continued to fall. I did buy puts again around the green rectangle, so essentially I am once again in a put diagonal.

Looking forward, the 190 support is holding up pretty well and AAPL is currently unable to break the 196 resistance I have drawn. However, I am seeing an ascending triangle which is generally a bullish pattern. This could mean that if AAPL breaks the 196 resistance, any downtrend would be negated. I would then be, once again, forced to sell my long puts.

A counter argument to the above is that the volume is quite low and falling. Also, on the longer time horizon charts (monthly and weekly), the Oscillators are VERY negative. On the weekly, the momentum is the lowest it has been in months and on the monthly chart, the oscillator has made the first bearish reversal since 2007.

Finally, a couple of companies upgraded AAPL to buy this week. Normally this would mean significant gains for any stock, but the lack of conviction in AAPL's upward movement definitely bodes poorly for the stock.

-wown
stockjockz.blogspot.com

Shorting Apple

2010-01-25T08:22:00.000-08:00

Daily Chart:

Notice the three Fibonacci confluence zones marked by the three red lines. These are zones the market has respected in the past. Although they seem very close to each other, they help me set entry and stop loss levels.
My entry was at $200, the middle Fib level (we shot past that today so I actually got an entry at much higher price).

The top level is where my stop loss would have been had I gotten an entry at $200. I am still using the top the level as a guide and setting my stop just above it. I know that if the market breaks this level, I am wrong and it is time to get out.

The bottom most level is currently my target. Notice the double top at $215 and how the Oscillator makes a second bearish reversal right at the double top. This is indicating that along with the Fibonacci and the price indicators, the oscillators are also pointing to a trend reversal.

Weekly Chart:

First, notice how the oscillator has made the first major bearish reversal since June 2008. This strongly suggest that there could be a serious pull back in AAPL.

Also notice the same Fib levels from the daily on this chart. Trace back to end of 2007 and mid 2008 and notice how the levels I drew held up nearly perfectly (blue rectangles).

My only concern as I entered this trade was that the price was edging very closely to my stop loss and a couple of times I definitely thought I would get stopped out. Also today price rebounded ~5%. This means that the hourly chart is showing strength (Indeed there is a major bullish reversal on the hourly chart oscillator).

In any case, I have entered a Put diagonal which you can see below along with the risk profile:

As I finish writing this, APPL's more than 5% gain today has diminished to around 1.7%. This means that the strength on the hourly chart has now been negated and of course also means that I making monies. Good thing too because I have been on a losing streak and I needed a good break!

- Wown
StockJockz.blogspot.com

Long SPY Calls

2010-01-22T08:04:00.000-08:00

As I mentioned in my last post, SPY was reaching resistance and it confirmed that resistance level by falling 4 points to the support level I had mentioned - see chart below. I now see a good bounce off the orange support level and I have gone long few SPY calls.

My target is 112.12 as this was the resistance in the previous bounce and is also a Fibonacci confluence zone. If the stock breaks this level, I expect it to go back to 115 area.

SPY Reaching Resistance

2010-01-19T07:26:00.001-08:00

I made this chart a couple of months ago and repeatedly the the Fibonacci levels I have drawn have been confirmed. Starting from the left, if you look at the blue ovals, you can see that SPY bounced right at the Fibonacci convergence areas. After four very clean bounces, SPY got stuck 110.5-111 which was major Fibonacci resistance area. It finally broke 111 as SPY hit the Fibonacci fan's 50% retracement. After that, SPY has climbed very cleanly along this line and has now finally (almost) made it to the orange rectangle which is the next major resistance.

Moving forward, I strongly believe that SPY will either get stuck between that orange rectangle or fall to 110.5-111 area. Seeing as how the market has become so inactive that I would call it boring, I suspect that we will probably move sideways along this level (also, another Fibonacci study I did showed that the market is indeed showing indications of continuing to move sideways).

- Wown
StockJockz.blogspot.com

Backtesting a trading system

2010-01-18T16:56:00.000-08:00

This post is mostly my feedback and analysis on a system that MarketMike has been working on. I figured it might be interesting to follow along for the readers and also interesting for us to look back and see how we developed it.

Above is the chart with the system implemented and the signals it has given since March on SPY. As it stands now, if you followed this system, you would have made -17.72%. But this does not mean that this is a complete waste, and below I show you why.

First, I think the logic on the system is reversed. If you simply turn all the short orders into long orders and long orders into short, you would have returned 21.52% since March.

Of course this falls very shy of the close to 68% you would have returned had you simply bought in March and never sold. So clearly we missed the boat on some good opportunities such as in July, October, and November. This is something that I will try to fix and see if I cannot get the system to not miss such good opportunities. An important thing to note, however, is the fact that once you reversed the orders you lost money only twice over the last year, which is pretty impressive.

I think if the system were supplemented with Fibonacci studies, one could filter out the unimportant trades and even find ones that the system missed. This will allow us to fine tune the system. Below is a chart of SPY on which I have drawn several Fibonacci levels. Note that all the levels I have drawn are based on data prior to 4/14/2009. So essentially all the Fibonacci levels are drawn as if today was 4/14/2009. This also assumes that I have ignored any signals the system has given up to this point.

As you can see there is very strong support at $81.50 and $82. SPY reached this level on 4/21/2009 Referring back to the chart above, you can see that there is in fact a Short (or after reversal, a long) signal on that very day. So I would have said, “OK, time to go long SPY”.

At this point, I would also project my resistance levels which you can see on the chart below. This time all Fibonacci levels are drawn using data prior to 4/21/2009, the day I went long SPY. As you can see the resistance lies between 87.15 and 87.5. We reached this price on 4/30 and lo and behold, the system gives a sell signal on that very day. My return on this trade would have been approximately 6.6%.Unfortunately, I would have got out too soon because had I waited another week, I would have made another 3% or so.

The next buy signal I get is on 5/8. I would not enter this position, however, because Fibonacci is telling me that there is resistance at $91.8. A very similar situation occurred on 5/12 and again I would not have entered this position unless I saw that the price broke the resistance lines. Not surprisingly, SPY hit the resistance lines and then fell right back to the 87.50 area which we had identified as resistance (and has now become support).

Ideally, the system should have given a buy signal on 5/15 or 5/26. There was a double bottom at a very important support level and I would have definitely liked to go long at this point. Had I gone long using the Fibonacci information, I would have entered at around 87.50 and exited at 91.70, returning around 5%.

After this the system is quiet for a long time, which is unfortunate because right around 7/10, it missed a huge opportunity that Fibonacci would have caught and returned around 15%. Many other such opportunities are missed and most of the other signals do not lie on Fibonacci levels or give false signals.

I think after some fine tuning this has the potential to be a very effective trading system. I think that the indicators need to be set on a faster response. I realize that this will give a lot more false signals, but you can eliminate those false signals using supplemental studies like Fibonacci or EW.
I also need to analyze other securities and see how the system works on them. Will keep you posted.

-Wown
Stockjockz.blogspot.com

Important Turn Date Approaching

2009-12-21T00:21:00.000-08:00

There is still no direction apparent in this market as it continues sideways, however there may be an end of this sideways trend in sight. Not only will the volume and volatility pick up at the turn of the new year, there is also an important date on 12/31/09. I found this cycle after the previous date registered back in September. Although it did not mark a reversal, the market rally was definitely slowed down, only trading higher by less than 5%.These past 3 months of the cycle definitely look less impressive than the previous 6 that preceded during the market rally. With heavy resistance overhead perhaps the market may begin to turn south at the mark of the new year.

Going on vacation

2009-12-19T09:42:00.000-08:00

I am going on vacation for a couple of months and in that time period I doubt I will be making many posts if any at all.

Good luck with your trading and Happy Holidays!

Wown

Do I still remember my login information?

2009-12-16T00:27:00.000-08:00

Hey all,

So I haven't written in a long time. I've still been around but I was studying for the CFA examination all this time and I felt it was better for me to take away some time watching the markets and blogging to free up some extra time to study. Anyway I'm back now, and hopefully I can get back to posting regularly. I guess the good news is that the market hasn't moved more than 20 points from when I last left. Its basically been trading sideways and I'm finding recent market activity to be quite uneventful, almost boring.

Unfortunately its not going to get much better until the end of the year I would suspect, I remember this time last year when we had our end of the year rally and I remember the same feeling even. However with the VIX now inching down near 20 we are getting 10-20 point days rather than 90-150 point days from this time last year.

The only thing I've noticed that has really made any significant type of change is commodities. Gold definitely had a nice parabolic run overshooting its channel, typical of a 5th wave in a commodity. Is it done? I'm not exactly sure but I'd like to think so because the dollar definitely is putting together a significant rally. The dollar should be off to a multi-month rally here and if that's the case watch out commodities. Its hard guessing anything near term nowadays but you'd like to think the dollar has to rest sometime and have some type of pullback which will give gold a last pop higher. One thing to note is that the market seems to be ignoring the dollars rally. A lot of us thought that once the dollar reversed higher the markets would come down. This certainly is not the case and one must pose the question if this is relative strength/consolidation building for the next move higher. To be honest I'm not quite sure, there's so many different signals that you can make the argument that the market will go lower or higher. If I had to say anything it would make the most sense the market continues higher as it has on every pullback since March.

I didn't prepare many charts for this update. I promise to do so next time. However I do have one chart that I find to be interesting of longer term history of market breadth.

What I have charted is the up/down ratio plotted with longer term moving averages (on top is 50, and the bottom is 200). As you see the breadth has been pretty strong since March. However both indicators are approaching the upper end of the range. Now if you compare to historical levels the 200dma is now in "overbought" territory and I guess you can say is generating a sell signal. The market can sustain a rally even in these conditions, however I've noticed that if both the 50dma and 200dma generate a common signal (by approaching extremes at the same time) then the market tends to react in the opposite direction. Its almost as if the market is telling you there is way too many buyers right now, time to sell we've gotten way too far ahead of ourselves.

If we use the logic behind this system it would make sense to me that the market should experience one last push higher so we can get the 50dma up into "overbought" territory. Then we can see some type of pullback. That is not to say a pullback cannot happen sooner, because the 50dma is beginning to roll over and prices going higher on weaker volume is never a good sign. Lets wait and see what is discussed in tomorrow Fed meeting. It is at least something to look at during the day while we wait for the volatility to creep back into the markets.

Portfolio Update and GDX Update

2009-12-07T09:30:00.000-08:00

This month I pretty much broke even though most of my trades are showing plenty of profit. Even I found this surprising because as I discussed in an earlier post, at least three of my trades were hedges for other trades and I expected them to show a loss. The reason why I have been successful on all fronts is that volatility has risen but the price action has not been volatily enough to offset my negative time trades.

My only negative trade for the month (which is my GDX trade) is only negative on the books (Mark-To-Market can bring down some of the largest investment banks and may even bring me down!). See below for a discussion on that.

YTD Return:	4.19%
Month's Return:	-0.09%
Best Trade	UNG: +19% (too bad this was also my smallest trade)
Worst Trade	GDX: -10%

GDX Update
If you are following GDX, you will know that gold dropped pretty significantly in the last couple of days and GDX followed suit by dropping around 12%. My trade, although still somewhat ITM, showed big time losses and my position was greatly altered. As such, I have gone ahead and bought a $48 calendar spread to neutralize deltas as well as prepare for a further possible down move.

I believe GDX could fall as low as $46 if it breaks current resistance. The chart below shows significant fibonacci resistance at $49 and $46. At the moment, we are very close to the $49 mark and today we were unable to sustain the lows. Gold too showed similar patterns and has in fact made a decent recovery in the last few hours.

My overall hypothesis is still that GDX and gold will not fall significantly (and by that I mean GDX at ~$40) until interest rates go up. Meanwhile, I have three targets over the next 2 weeks - $46, $49, $55. More than likely we will see it stay between $49 and $55 which are the two major support and resistance areas.

My GDX Trade
After many modifications and adjustments, I have finally reached the following trade (see chart below). Unfortunately, at this point, I am simply trying to curtail losses as much as I can for this month. My plan is to let this trade go to expiry and then roll it into the next month. I believe that although at this moment I am showing a loss of nearly 10-12%, this will significantly fall because my short options are very overpriced because of the recent volatility. For instance, my 50 Puts are trading at $1.65/contract when there is a mere week left to expiry and the option is OTM.

IV has spiked up and although it is hurting my short positions quite a bit, my long positions will benefit as I roll this trade into next month.

Here is the current (very complicated) trade:

Ignore the colored trades

Trading Lessons You Will Not Find in Books

2009-11-24T08:32:00.001-08:00

I have read around six books and countless articles on trading. I have been trading equities for about a year and a half now and options for about four months. There is one thing I realize now: there is no better teacher than experience. Even after reading all that literature, I make mistakes that are stupid and easily avoidable.

In this article, I will list as many of those mistakes as I can remember and what consequences I faced (or someone else faced) by making those mistakes.

Diversify
I cannot stress the importance of this lesson. The main point is if you do not diversify, eventually you will make a bad call and get wiped out. Such a disaster can essentially end your trading endeavors.
One of my friends made this mistake and brought his trading career to a halt. Close to a year ago when Wachovia hit $10/share, his analysis and thought process said that Wachovia would not fall much further. He proceeded to invest close to 80% of his money in Wachovia. Next day, Wachovia crashed to mere pennies, pretty much wiping my friend out (Although thanks to Wells, it came back close to $7. I personally bought at around 53 cents and sold at around $6 - best trade of my life :)).
Even if your analysis is perfect, there is always a chance that you could be wrong. Individual traders especially have very limited information and thus can very rarely assume that they are 100% correct. Because of this reason, always know what your max loss on any one trade will be in the worst case scenario and make sure that such a loss will not completely wipe you out.

Watch the commission rates
This applies close to home for me because I have very limited capital and any commission I pay significantly cuts into my profits. Things get especially worse when I have adjust and readjust my trades to show profit. There have been many times where although I am showing a 10%-15% profit, really I am breaking even because of all the commission.
Even now, more than 5% of my account has gone to commissions and in fact at this moment, my commission fees outweigh my profits!
However, I have truly cut down on my commission fees by making better decisions and cutting down on the number of trades. I think in the past two months I might have spent only 20% of my total commissions and I have been trading options for only 4 months.
If you use TOS software, make sure you turn on "INCLUDE COMMISSIONS" on the analyze tab as this will really help make better decisions. If you do not use TOS, try to take advantage of any discounts/perks your broker might offer. Keep in mind that some brokers will make special deals with you if trade more than a certain number of trades/month. Apart from that, I have no real way of avoiding commission fees.

Have an action plan before you enter the trade
A lot of the equity/futures trading books emphasize this point quite a bit. However the option educational material seems wanting in this area. Ironically, this probably applies a lot more to the options market than to any other market.
I think the problem is that there are infinite possibilities of how to handle an options trade. You can simply exit the position, you can switch your position for another one, you can change strategies, you can make a horizontal shift, and you can pretty much do anything you want if you are creative.
If you do not have an action plan, however, you will simply end up spending a bunch on money on commissions while you keep readjusting your trade and at the end still make a loss.
I suffered greatly from this when last month I traded a bunch of calendars expecting the stock to remain in the calendar's trading range. However, I was hit with unexplained volatility which took me for some of my largest losses yet. Because I did not have a plan, I chose to simply exit the positions, sealing in those losses. Looking back, there are a variety of things I could have done to avoid those losses and even turn some of those trades into profits.
I strongly urge you to analyze all the possible scenarios and have plans for each of them: what will you do if the underlying goes up/down 0%, 2%, 5%, 10%, 15%; What will you do if the implied volatility falls/rises 5%, 10%, 20%. If you have these bases covered, most of the times you should be in good shape.

Keep a close eye on Bid/Ask before trading
This, again, holds especially true for options. Let me illustrate with the following example:

Today, PRU is trading at 49.12. I am looking at the option chain and see that the "Mark" (or the quoted price) for Jan 2010 49 Call Option is 3.30. But the Bid/Ask tells a different story.
Bid Price: 3.20; Ask Price: 3.40.
So I say, "OK, let me buy a call option". I spend $340 and buy one contract. Five minutes later I realize that I need the cash for a margin call and am forced to liquidate the position (Of course you would never get into this situation if you follow advice # 3).
I turn around and sell the option while the Mark is still 3.30. No big deal, right? No profit/loss, right? Wrong!
When I sell, I must sell at the bid price, which is 3.20. So I get $320 back, taking me for a $20 loss. In five minutes I lost almost 6% of my capital even though the option price has not changed!
I have made this mistake many times because I look at my positions and they show a profit of $XYZ so I get rid of them. But because of the Bid/Ask spread, many times I have quickly turned healthy profits into heavy losses.
My advice is to use the Bid/Ask prices in your analysis rather than the quoted "Mark" price as most options software will use. If you use TOS, the analyze tab does an excellent job of graphing your profits/losses based on the bid/ask prices.

Beware the ITM short options
When you are short an option and it goes ITM, I become very wary and try to get rid of the ITM options as soon as I can. The reason is that if you get assigned those options, your position changes drastically and unpredictably. Below is an example.
I had traded a HPQ calendar and the trade, one day before expiration showed a nice profit of approx 20%. On the expiration date, the short options went ITM and at the end of the day I was assigned those shares. Next thing I know, I am short 500 shares of HPQ and the stock jumped around 5% the next day, wiping out all my profits.
My advice is to buy back ITM and close to ITM options as expiration approaches. You might give up some time value but are protected against drastic market changes that could take you for a much larger loss.

I hope the lengthy advice can help you in your trading career and you can learn from my mistakes. I am also certain I will make many more mistakes and I will try to update this list as I make those mistakes. I only hope that overtime my right decisions outweigh my wrong ones.

-Wown
StockJockz.blogspot.com

GDX, PG, UDN Trades

2009-11-23T09:14:00.000-08:00

GDX

Here is the original trade. Today GDX climbed up to 4% at one point, taking me for a pretty significant loss. I took the opportunity to sell more OTM puts.

Sold 2 more Dec 47 Puts and one 52 put. This makes short puts' premium at 30.6% of my long position. I am also not nearly delta neutral and if I simply maintain my neutrality, I can expect to make nearly 30% - ~7% (the time decay in the long position) by end of Dec.

PG Diagonal
Fairly basic diagonal for now. It represents a lot of properties of a calendar and that is because the premium I got for selling the 62.5 Call was higher than any of the other strikes.

UDN
The government seems unlikely to take any action against the falling dollar and I believe the weakness in the dollar will continue for some time.

Long 100 shares of UDN, Dollar Bear Fund.

The Anatomy of the Pump & Dump

2009-11-21T14:01:00.000-08:00

I found this very informative video that actually elaborates on some of my previous picks and some of the terminology I have thrown around, ie: "taking profits" and "pump and dumps" -- Shout out to StockJock-e of the HotStockMarket forums for this video.

A Look At My Holdings

2009-11-20T12:48:00.001-08:00

When I first started writing here, I had meant this to be a place where I could track my performance and write down my analysis of my various holdings. Lately, I have been slacking off on that because I have been busy with other things/lazy. This is my attempt to get back on track of my original goal.

Below are my current holdings and those that I have not already explained in this blog have a short explanation with them:

GDX Put Diagonal

SPY Put Diagonal
This is a 103/109 Dec/March put diagonal. Clearly I am bearish on SPY and expect the index to drop to around 100-103 area. This diagonal sets me up perfectly for such a scenario and allows me max profit if SPY drops to $103. The short puts expiring in Dec allow me to keep paying myself dividends and each month reduce my total risk in this trade.

So far this trade has returned about 5% as SPY has dropped approx 2%.

MO Call Diagonal
Altria is a fairly stable company with a low beta and a relatively small trading range. Because of this, I expect the price to remain fairly stable and I am going to capitalize on the dividend-like properties of the diagonal.

Addtionally, this is trade mitigates my risks in SPY. If SPY rises, I can expect MO to rise and the way I have the trade set up, my profits in MO should outweigh my losses in SPY. If SPY falls, I expect MO to fall as well but my losses in MO are lower than my profits in SPY.

The trade itself is a Dec/Mar 19/17 Call with a 4/5 ratio. So far, this trade (which has carried over from previous month) has returned -2%.

WMT Call Diagonal
My thoughts on Wal-Mart are very similar to my thoughts on Altria. Same basic strategy and philosophies apply: dividend play and risk mitigation on the SPY.

The trade is a Dec/Jun 55/47.5 Call Diagonal with a 10/5 ratio. This trade has returned approx 1.3%.

UNG Butterfly
This trade went awry and completely did not do as I expected. However, because I had mitigated my risks well, I am still making profit on this trade.

So far, this trade has returned approx 53%.

PRU Double Calendar
A complicated trade that I entered expecting PRU to trade in a range. Instead PRU took a wild swing up and then down. This lead to me having to readjust this trade repeatedly. Unfortunately this is also one of those trades I entered into without a clear action plan and so I am suffering.

At the moment, the trade has become a Dec/Mar 47.5 Call Calendar spread with a 1/1 ratio and a Dec/Mar Put 50 Calendar spread with a 4/5 ratio. Currently this trade has returned approx -3% including all the transaction costs. I am just trying to work this trade off my books and expect that I am in a good position now and should be able to do so by Dec expiry.

Other trades
There are a couple of trades I had similar to the PRU trade which I have managed to work off by today (Nov expiry). The losses from those trades are offsetting my profits on all the trades I currently hold. If I had done my due diligence as I have with all these trades, I probably would be up around 15% for the month. As of now, it looks like I am breaking even - which is a real shame.

GDX put diagonal

2009-11-20T09:34:00.000-08:00

Based on my thoughts on the overall on the commodity/dollar and GDX (Dollar, Interest Rates, and Commidities), I traded the below diagonal:

I expect GDX to continue falling to as low as $45 if not more. I also plan to keep rolling the trade by selling puts every month (Dec and Jan). With these short sales, I expect to capture 30% of the long put's price. If GDX rises or stays constant, I will just sell more OTM puts to become delta neutral and get more premium.

For my overall strategy on diagonals in general, please refer to this article. Otherwise this is a fairly bearish simple trade on gold.

Dollar, Interest Rates, and Commodities

2009-11-20T07:32:00.000-08:00

Dollar

The USD continues its depreciation against nearly all other currencies. However, seems like this is not one of the concerns of the US government as it keeps overnight interest rates to all time lows (see interest rates). At the same time, this decline cannot continue infinitely before problems come knocking.

Look at this from a purely economic standpoint: if the dollar continues to decline, US buying power will fall significantly. This would mean an increase in the price of all commodities that are valued based on the dollar (silver, gold, oil, natural gas... pretty anything of importance). Eventually, inflation will take over and the moderate GDP growth that we have seen will pretty much be negated.

This problem is further heightened by the fact that China holds trillions of USD in its reserves that it might decide to trade away for a stronger currency like the Euro.

Historically, China's RMB has been pegged at RMB7-8/$. Chinese government has taken a lot of pains to keep this exchange rate constant so that their exporters have an advantage when trading with the US. As China becomes more economically independent, this incentive to keep the interest rates constant is falling. If the Chinese decide to let market forces dictate exchange rates, they would trade away their dollar reserves. This will lead to further weakness in the dollar, leading to all the bad things I have just said.

On the flip side, the weaker dollar allows for more US exports which is a boon to the government as it tries to work off its enormous deficit. However, the negative effects of a very weak dollar far outweigh the positive effects of the increased exports.

Thus, for the economy to continue functioning, I strongly believe that the dollar needs to make a recovery. I am unsure as to when this could happen - Let us look at the charts.

The /DX managed to break both the 8 day and the 21 day MA today. However it wasn't able to sustain the breakout above the 21 day MA, so a turnaround based on MA's is still not confirmed. The Stochastic Oscillator is showing mixed signals as it goes back and forth in between overbought and oversold zone. We have also seen 5 waves down on this chart meaning that this downtrend is over and right now we are consolidating while we decide which way the next trend is going to go.

Unfortunately, at this time, I cannot with much conviction say where the dollar is going to go. I believe it will depend on a major event like interest rate change or other government activity.

Interest Rates

As I mentioned, interest rates are at an all time low - in fact yesterday for a short period the short-term interest rates were NEGATIVE!!! This is pretty amazing and it could mean two things:

1. Investors have such little confidence in the equity/riskier bonds market that they are actually willing to take a little LOSS in interest rates to be able to buy risk-free securities. That says a lot about the investor confidence in the equities market.
2. It also means that investing in US-backed securities is worthless to foreign investor. As an investor in China, I would much rather invest in a relatively risk-free Chinese bond and make a small return than invest in the US and have a negative to zero return. This ties in with the weakening dollar - as fewer investors come to the US, the dollar further weakens.

Once again, I strongly believe the US government is going to raise its target Fed rates to improve this situation. However, I do not know how soon this could happen - probably not until the next Fed meeting.

Commodities

Why have the commodities across the board (except Natural Gas, which I traded thinking it would go up) gone up? Is it because of the booming economy and the increased global demand? No - the simple reason of the commodity bubble (yes, I said bubble) is the falling dollar.

Gold:

A megaphone top has formed on GDX and this is coupled with a bearish reversal on the stochastic. Additionally, the 8 day MA was broken in the last two days further showing bearish signs. Coupled with the possible reversal in the dollar, this could be the turning point in GDX. However, if the dollar continues to decline, I believe at best we will see a modest correction before the gold goes right back up.

Oil:

Oil has been moving sideways for nearly a month now and no significant technical patterns or indicators have developed on the daily chart. An important point, however is that the bollinger bands are now at one of their narrowest point. Generally, if the bollinger bands narrow out that much, one can expect them to widen very soon and widen quickly. Widening would obviously be preceded by a large move in oil. As to when could this happen - watch the dollar.

When the dollar moves, so does everything else.

Multiple Time Frame Analysis on SPY

2009-11-12T13:00:00.001-08:00

Weekly

The general up-trend is still very much in tact on the weekly chart. According to EW theory, we have only completed waves 1,2,3 and maybe wave 4. It is also possible that we are in the middle of wave 4 which is really an ABC correction.

If the former is true, we should see wave 5 to continue upwards. However, since wave 5's are generally the shortest, the up-trend is drawing to an end rapidly and we can expect a consolidation or a significant correction fairly soon.

I believe the former scenario is less likely because that would make wave 4 and 5 too short. Wave 2 was four weeks long and both waves 1 and 3 spanned over two to three months. We can expect to see similar numbers for waves 4 and 5. This would put the end of wave 5 in early next year. I believe this makes a lot of sense because this could coincide with a poor holiday retail sales results, which could serve as a catalyst for the end of this up trend.

Thus, the latter scenario, which assumes that we are in the middle of wave 4, which is an ABC correction, is more likely. I believe the waves A and B are over and wave C has begun which could take us down to perhaps the $102-103 level before continuing the move up.

Daily

The wave pattern is harder to discern on this chart, but the key points below show why I believe that we should see a wave C down or the end of wave 5 from the weekly chart.

There is significant divergence between the various indicators and the price. Firstly, the volume has continued to decline while the price has continued to climb. The Stochastic oscillator made a bearish reversal yesterday which followed through today. Finally, the NYSE breadth trend has also reversed in the past couple of days. All this points to a bearish outlook.

Intraday

The most important factor on this chart is the huge resistance at the dark red line. We have bounced off there four times in the past few days and the last time we tested that resistance and failed to break it, we fell about 7 points on the SPY. In the last two days, we again tested this resistance, created a double top, and then today sold off more than 1%.

Also on this chart, the various MA on the chart made a reversal at the end of the day today. Although by itself this is not a good indicator, when mixed in with a double top, this is indeed very significant.

Summary
Keeping the long term view in mind, we must acknowledge the fact that we are probably still in an uptrend. However, rarely have the bearish stars aligned so well that all three charts, the weekly, the daily, and the intraday, are showing bearish signs.

If we do sell off in the next few days, it is most likely this sell off will only be a correction to the overall up trend and people will buy the dip again. However, as I have already said, there is a possibility that wave 5 ends here, in which case the sell off could be very significant indeed.

Short on Laboratory Holdings

2009-11-11T10:08:00.000-08:00

On daily chart, you can see a 1-2-3 wave completed. In anticipation of a wave 4, I am shorting LH and expect the stock to fall to close to 71.50 level before starting wave 5.

There are multiple reasons to believe wave 4 is starting. On the daily chart, a divergence in the momentum and price action has begun and a bearish reversal in the overbought zone has occurred on the Stoch. This reversal coincides with the price just reaching important fibonacci levels.

The hourly chart is showing some support at 72.80 level - right at the 21-hour MA. If the price breaks this support, there will be strong conviction behind the wave 4.

Finally, I also believe the overall market is once again losing momentum which could propel the down move in LH.

I shorted at 73.06 with a stop loss at 73.40.

-Wown
Stockjockz.blogspot.com

X and PRU Calendars

2009-11-10T10:02:00.000-08:00

Entered two fairly simple trades in a post-earning environment:

US Steel Corp. - X

The price is hovering right in the middle of the Bollinger Bands, the 8, 21, and 200 day MA are converging, and finally the momentum, what little there was, seems to be weakening. The fact that the earnings were just released a short while ago strongly leads me to believe that the price should channel within a short range for a while.

The trade above shows a profit if X remains between $36-$40. This means that a mere 5% move in either direction could put me at a loss. However, if I manage the trade well, I can probably extend this range to around $32-$44. Given my original hypothesis, I strongly believe X will not move out of the 32-44 range in the next two weeks.

Prudential Financial - PRU

The setup is very similar to the US Steel trade. Once again, my profit range as of now is $44.50-$50 but can be extended to $42.70-$52.

Both these trades have a very high probability of success and the risk/reward ratio is within my risk appetite. I will post any adjustments I make as the trade plays out.

Here we go again...

2009-11-09T23:06:00.000-08:00

Appears we just completed another buy the dip cycle with today's rather unexpected huge move to the upside. I have found it frustrating (although I have caught on recently) trying to call these dips because each one begins to appear to be a breakout (or breakdown) but then is sold (or bought) immediately and we fall right back into the trading zone. Each time the market breaks out everyone gets a little too bullish or bearish (in my case) and feels as if this it IT. Well so far for the past 2 months it hasn't been IT.

Now with the Industrials at new highs one has to try to determine the next upside target and play this game again. I feel as if its way too late to go long because the risk/reward ratio just isn't there, but I'm certainly not ready to go short yet either. There are a number of things to mention such as the dollar retesting lows, gold perhaps topping, and divergences in the indexes, but I think the most important things to watch is the 50% retracement in the DOW which is within 110 points, and the 61.8% retracement in the Nasdaq 100 which is quickly approaching once again. These should serve as heavy resistance up ahead.

One thing that is pretty evident in this past few rallies is that the rally typically exhausts after a big 1-day breakout move to the upside.Notice in 2 of the past 3 breakouts of the blue line, we had one large full bodied candle to the upside right before we started to top out and then head lower. This is something to keep in mind and is one reason why I would not be going long right here. Chances are you might get 50-100 Dow points if you time it right, but it won't be very easy gain to capture.

The only thing different this time is we had the highest upside breadth in the market since July. That day we had 28:1 Up/Down volume ratio. Today we saw 18:1. Could it really be possible for this entire 2 months to be considered consolidation before we move another 1000 points in the S&P? Too many things lined up (for example my cycle chart) for October 21 not to be the high and it would be rather disappointing if the market continued higher, but I guess thats just how the cookie crumbles.

SNVP: Savory Energy Corp.

2009-11-09T14:12:00.000-08:00

SNVP looks to be the next big pump penny stock, but there is reason to be weary. Grassroots and many different penny stock pumping agencies have begun soliciting SNVP as their pick for the month of November, and while the big picture might look bright and prosperous it can also turn dark and gloomy in the snap of a finger.

First let's take a quick look at the company SNVP. I have actually had the luxury of following this stock for the past few months now and although I missed out on today's big pump and this weekends emails from solicitors, I saw this one coming. This company has gone through a number of name changes and mergers bouncing between the male hygene industry to it's current line of work in "the selling of oil that has been extracted from wells". And while their current claim that they are working on 4 different properties located in Gonzales County, Texas may cause excitement in the industry, i'm not sure it is enough to give this stock a $2.92 price projection that grassroots research is providing.

Bottom line, I don't trust that price as far as throw it (I believe they call it making it rain these days). Nonetheless keep an eye out for this one, there is definitely a huge potential for money to be made here if you are willing to take the risk and can get out in time. As of now, this stock closed at .152 today, after a 90% gain on no news (other than the pump emails). I have no problem valuing this stock in the .10-.30 range (as it has been over recent months), and with this pump there is potential for .85 or so. BUT BE CAREFUL! If you are interested in the risk and the huge investment potential, I would recommend considering buying and holding for a nice 1 bagger or so. If this thing does make it to .85 or so it will eventually all fall down before you know it, DON'T GET CAUGHT HOLDING THE BAG! Don't get caught up in the greed, play it safe and take your profits! Best of luck to all!

Go With The (Short Term) Flow

2009-11-09T12:05:00.000-08:00

After a two weeks' retreat, I come back to find the market prices nearly unchanged. Although we fell to around 1040 for the S&P, we are now back to the 1093 level I last looked at.

Because I was not keeping on top of my trades, I failed to capitalize on the dip when the prices fell. Although the set up for a lot of my trades played out nearly perfectly, because I did not exit in a timely fashion, I gave up some excellent profit opportunities. Instead, I was forced to exit a few of my positions at a loss as the S&P gained 20+ points today. What is the motto of the story? If you are actively managing your investments, do not neglect them and hope for the best. I read somewhere "Hopium is a drug that will destroy any trader".

Moving forward, I believe we can see the S&P reach 1100-1110 level based on the chart below. As MarketMike already mentioned in the previous post, this upwards move looks very much like an ABC correction to an overall downtrend. However, after the ABC correction, the overall trend could reverse and the upwards move could continue, in which case my target would be 1160-1170 before the next correction. In either case, there is still room to capitalize on this wave C which I believe is not over yet.

HEIKIN ASHI:

CANDLESTICK:

As you can see, the Stochastic is showing a very bold bullish momentum coupled with improving breadth ratios. The Heikin Ashi chart - which, in my opinion, shows the trends in a much more clear fashion (compare to the candlestick chart) - shows that the bullish trend is strengthening (longer bullish bars with shorter to same length tails). Finally, the price broke above the 21-day MA which generally serves as a pretty strong resistance.

So, I am going long SPY with partial exit at around 1100. It is a tight trade with a potential for a mere 3-4%. The time frame is also very small and my time studies indicate we should reach the target in as little as a week.

My reasoning is that we are once again approaching cross roads where the market could go either way. I would rather take small profits and wait while the market makes up its mind than take big bets and have those bets fail. The time for big bets will come, but it is not now.

-Wown
stockjockz.blogspot.com

Taking 5 Steps Foward, 3 Steps Back

2009-11-08T22:39:00.000-08:00

Spent some time over the weekend educating myself a bit more in Elliott Wave. A five wave move down from the October 21 high seems clearly evident. So far it has been fundamental in its manner. To remind you all a bit about Elliott Wave - and to double check above...

Wave 3 is never the shortest wave, typically the longest
Wave 4 will not enter the price zone of Wave 1
Wave 2 cannot exceed the start of Wave 1.

Some other relationships to describe the chart above:

(5)'s price was 261.8% of (2).
(3)'s price was 261.8% of b of (2).
(5) is 61.8% of (1) through (3).
(2) was a flat correction while (4) was a sharp correction - the theory of alternation.

Since everything has lined up perfectly so far, it would only make sense that the correction reaches the 61.8% mark. And if A = C then our target range is 1074 - 1076.

Lets see how it plays out.

1930 era vs 2000 era

2009-11-07T15:12:00.000-08:00

Another comparison, with price and time comparisons between the NDX of 2000s vs the INDU of 1930s.

Judgment Day

2009-11-05T18:29:00.000-08:00

Well we got our rally and that is enough to switch the short term trend positive. Now it is time to see the follow through, however I don't believe it will be so easy. You have the 61.8% retracement and plenty of other resistance including the major broken trendline in most of the indexes. Any stop near the 61.8% retracement will generate a head and shoulders top. I don't want to get too excited about this pattern because it has already failed once in this rally since March, however this could actually give it the excuse to sell off. Too many people will be saying the head and shoulders didn't work then, it wont work this time either. Breadth is increasing but not nearly as strong as it fell and is appearing it will continue to diverge. Overall volume continues to be lower on this rally/retest.

SPX Earnings Estimates

Recently I hear all this discussion about the SPX being fairly valued because estimated EPS around $80 is not unreasonable. However if you look at the data above, the current EPS of the SPX is 49 while the current estimates are 62. The estimates for next year as calculated by Bloomberg is 78. Now, if our current EPS is 49, and the estimate is 62, doesn't that lead you to believe that an estimated EPS of 78 is a bit too high. That would require a 59% increase in EPS. I don't see how this is feasible unless I'm missing something here. It seems as if I am, at least I hope so.

I've applied those estimates to the chart above. I've calculated the average P/E ratio to be 16 and therefore have applied a 16x multiple to the earnings to generate a fair value for the S&P. By plotting this against the current price we can also try to compare which one the market appears to be looking at. If we go with actual earnings, our fair value is around 780, while using the estimated earnings would put us to around 1005. I'm not sure how credible this study is but it is certainly something to look at. It would appear no matter how you look at it we are overvalued based on EPS but due to extreme bullishness in the market, momentum has carried us well above fair value just as it carried us well below back in 2008.

Analyst Research
Another thing that I've recently thought about is the fact that analysts typically always have some sort of premium on their targets and more often then none their rating structure looks a bit like this:

Buy: 60%
Hold: 35%
Sell: 5%

Obviously they are trying to make money and by issuing sell reports on every single stock they will generate no revenue for their firm. Everyone knows this but another thing I was recently thinking about is in relation to using price multiples to generate targets. These are great if the company is market is fairly valued, however what's not to say the market has been overvalued for 20 years. Most stocks only go back to the beginning of the bull markets and I don't think there are any that have data dating back to the 1930's. So if you try to find the average historical P/E ratio of a stock and apply an estimated EPS to find a target price, more than likely you're going to be giving an overstated stock price. I could come back in 10 years and laugh at how silly this is but I'm just jotting down some recent thoughts I've had.

Hochberg

Hochberg spoke on CNBC this morning very briefly. He is the guy who does the Short Term Updates from Elliott Wave International. They didn't allow him to say all that much and it almost appeared as if he was being ridiculed, but what I really thought was interesting was the user comment section on the news story CNBC posted on their webpage. You can find it here.

Here are some that I found interesting, and I hope I have their permission to post them on this blog:

"Anyone calling this a "bear market rally" just shouldn't be allowed to touch this market. I feel bad for the people that trust their money with the ones who believe this is a bear market rally. A bear market rally does not have higher highs and higher lows. A bear market rally does not last this long. Come on people. Wake up and smell the recovery."

"Anyone who believes that this was a bear market rally must also believe that we are going to go lower than the March lows. The March lows priced in dooms day. I just don't understand how any reasonable person can look at the charts and the fundamentals and say that this is a bear market rally. This person is mostly likely majorly short."

"I'd also like to know where you get 91% bulls? Every news item you see is about how this is a bear market rally and that the world is coming to an end. If you listen to people who know what they are doing and who have a proven track record such as Warren Buffett and Jim Cramer you wouldn't be fooled by the negativity of the fund managers who have an agenda."

These comments are a good example of the optimism that has been built into the markets. Not a single post agreed with him even though a year ago he had come on CNBC and had done a pretty good job of forecasting the move lower in the markets. The first comment just does not make any sense. I at least agree with the second comment on 2 things. A bear market rally does in fact mean we will see lows below March and EWI is in fact majorly short, in fact 100%. However I do not rule out the fact that this is not a bear market rally because the charts and fundamentals both tell me it certainly can be.The third comment is at least a bit reasonable, but the 91% shouldn't matter its the same survey that told us that there was extreme bearishness at the March lows. If it worked then, it should work the other way around. Also who is to say that Warren Buffet and Jim Cramer have proven track records? I think last year kind of proved these guys can be wrong too. Perhaps a few more years of the bear market will make people have their doubts.

Lastly I'd suggest you guys go and check out elliottwave.com as they are having a free week this week where you can read a lot of their material for free. Just sign up for a free club EWI account. Its certainly worth it in my opinion.

Dead Cat Bounce?

2009-11-04T20:36:00.000-08:00

Not much to talk about as the market has been almost uneventful, especially based on closing prices. Despite closing in the green for 3 days, the SPX Cash Index is only up 10 points. The setup was pretty bullish 2 days ago but the longer it takes to develop a bounce higher the less time I give the bulls to try to recover old bullish optimism before fear begins to take over. We attempted to rally today however we gave up just about all of the gains in the indexes by the end of the day. The /NQ made it up to its 38.2% retracement which is typically a minimum target for a bounce, before it sold off. As we speak the SPX futures are down 4 points, despite Cisco's earning suprise, already giving back almost half of the bounce we've seen since Monday.

Short Term Trend: Down
Intermediate Trend: Up
Long Term Trend: Down

I still believe the short term trend is down, but will be broken if we see a pretty decent sized rally tomorrow. The intermediate term trend as indicated by the blue line in the chart above is still up until that line breaks. I believe thats the only thing holding up the market right now in hopes for the continued bounce pattern that had been occurring. However unlike our previous bounces we have sold off on our rally attempt. I believe this has occurred because the long term trend is now down as indicated by the red trendline. I should have a more exciting update tomorrow.

Possible Rally Ahead

2009-11-03T00:54:00.000-08:00

Have to respect the falling wedge pattern that has developed on the 30min charts over the course of the past couple of days. Although I believe the longer term trend has indeed changed, we have to respect an oversold bounce to take in effect. Today's action was very weak for the intermediate term in my opinion. It appears as if the sellers are in control.

The Trendline Retest

To explain a little bit of what I mean. Take a look at the chart posted above. Notice the past couple days before today we had some pretty large candles. What I saw happened was initially a break of the trendline support which sparked intense selling pressure. We closed at the low of the day as people sold out as the trendline became more obvious it was going to break. This trendline represented what was holding up the markets rally since March, and everyone was watching it (as they were with the Head and Shoulders back in the Summer).

The only way to save a break of the trendline is by doing what we did last Thursday. Typically you want to see an open on the cash index right at the previous close and you want to see a strong rally right at the open (avoiding any type of tail on the bottom). Usually if you can close near the height of the previous candle, and save previous support, you have completed what I like to term a fakeout reversal candlestick pattern. This is what happened on Thursday and I was actually a bit bullish going into Friday. However for the first time I've ever seen - or at least can recall - we registered back to back fakeout reversal patterns as we rebroke support on Friday and dropped nearly 300 points in the Industrials. It makes it appears as if Thursday's rally was just a retest of the old trendline. I believe this is a monumental development going forward that indicates that in fact we have begun a new downtrend. We shall wait to see if this downturn turns into just a bull market correction or the continuation of the old bear market.

Transports

Here is the transports chart which continues to underperform. Don't be too caught up in the Industrials and ignore whats going on 'behind the scenes' in some of the other sectors of the market. Transports are getting slammed are are actually looking to be due for a bounce. But that would be in a normal market, the fact is we were so extended to the upside this actually appears to be just getting started. Again time will tell.

Banking Index

Possible head and shoulders top in the banking index, or triple top. What do you think? Either way it appears some type of support was broken as indicated by the blue line. We are in the process of retesting. This is painting a pretty bearish picture, so it will be interesting to see what they can do to recapture that support. If there wasn't that falling wedge in the SPX and I only saw this chart I would be pretty bearish right now in the short term.

USD

I do my best to try to include some original charts that you won't find elsewhere. Here is a long term chart of the DXY Index (US Dollar). The chart is split in two and the peaks are matched up. I would say the dollar appears to go through a cycle of highs and lows and that we are about to start the next bull market in the dollar according to this cycle. However its only worked twice, who's to say its going to work a third time...

They Did It Again

2009-10-29T19:50:00.000-07:00

Somehow the bulls managed to bounce this market to make it appear bullish once again.I had been mentioning that I was not entirely convinced that yesterday's break of the trendline was entirely bearish. It was not a surprise because they pulled this trick in July in regards to the head and shoulders. I'm looking at this in two ways:

1) Just like in July they got everyone short on the break of the trendlines (this is evident in the heavy selling volume in the index ETFS and market breadth). The short covering rally will attract more buyers and the market may attempt a run to 1121, and perhaps even 1230 (doubtful).

2) We've been trained to buy the dips, but the trendline is now broken. In addition so many others things that I've already pointed out give strong evidence that the top IS in. Therefore people will begin to buy these dips, but the market will make a quick turnaround next week and all these new buyers will allow the market to go lower.

The chart above shows a regression channel on the S&P. It just shows how systematic this uptrend has been lately. Up and down making higher highs and higher lows. Take note that yesterday's and today's actions are very typical for a reversal. I like this 2 day candle pattern even more than a hammer or shooting star. It typically occurs by having two full bodied candles, one up and one down, going through important support/resistance in the 1st and reversing back and saving support/resistance in the 2nd.

The Nasdaq

The Nasdaq and Transports both were weaker than the Dow today. However any further upside would favor at least a retest of highs, disregarding my #2 scenario described above. Note the major RSI divergence occurring on the daily. Just as we've had a nice uptrend in stocks, the RSI has continued in a nice downtrend. Not a good sign.

S&P 400 Mid Index

The S&P 400 Mid was a favorite for me back in December when I was comparing the charts to the 1938 scenerio. I liked the structure a bit better. It seems to be a mix of the Nasdaq and the S&P 500. Notice how the retracements have played a very significant role in defining support. Currently it appears the Mid is obeying its rally trendline, unlike all other indexes. Support was found by the intersection of the trendline and the 50% retracement. Perhaps this is the one to continue to watch. This chart tends to make me believe we will reach the 61.8% retracement.

McClellan Oscillator

Chart courtesy of McClellan Financial Publications

To substitute my normal discussion on market breadth I'm posting a popular picture posted on many blogs recently of the McClellan Oscillator. For those unaware you can read investopedia's definition here. You can notice that the oscillator was significantly in oversold range. In fact it was at it lowest levels since the rally began, and as levels such as the November and March Lows. It also appears as if there is a very good possibility we will see a bit more upside, perhaps until it gets to -100 in the chart above.

Whats up with Goldman?

GDP came in better than expected today at 3.5%. Yesterday Goldman Sachs downgraded their forecast from 3% to 2.7%. My questions are why do they update it the day before, why wait until the last second... (they do this a lot I've noticed). Also you would think that with new data they would have a more correct number, not make their forecast worse. Typically you think of Goldman as the cream of the crop, and if they are making these types of mistakes you almost automatically think manipulation. This plays into the #1 scenario I posted above, and yesterday gave Goldman the perfect opportunity to go long for the last major move up in this rally.

Perhaps Goldman knew that the GDP would come in at 3.5%, but instead they lower their forecast. (What do they got to lose by doing so) They know the market is in a state of fear and confusion, being down a good 5% from highs and breaking the major trendlines. They figure if they can get in investors' heads that the GDP number is important for the markets (which its shown its not) that they can make some money on the long side in an oversold bounce.

I don't know if I necessarily buy into the whole manipulation thing, but I can tell you a lot of people do. I will say theres a possibility this actually does occur, but perhaps people just cannot understand the reasons why markets move. As humans we typically want a reason (or an excuse) to why things happen the way they do. Perhaps blaming Goldman or the Fed is what we do when the market makes a move against us. Someone else has to get the blame, not ourselves.

Please check these links on Zerohedge for more information on Goldman and the GDP numbers:

http://www.zerohedge.com/article/thats-how-you-bounce-support

http://www.zerohedge.com/article/goldmans-extended-gdp-analysis

Trendline Broken

2009-10-28T22:19:00.000-07:00

Recent Market Happenings:

Major trendlines are breaking
Adv/Dec ratio spiked today
Down volume taking over
Huge volume flowing into UUP (US Dollar ETF)
Huge volume flowing out of SPY (S&P 500 ETF)

To briefly discuss today's events. We broke the trendline early in the morning and as the day progressed and people began to realize the trend would not be saved by the close the sell volume started to pick up and indicies drifted lower during the day. The Dow only being down 100 was not enough to justify what happened in most stocks. Although there were some that held up, such as V and AMZN, most stocks were down 3-5% on average.

This is just a small list of many things we've seen the past few days that continue to support further bearish action. However, I'm beginning to lean towards a bounce, but the trend is now down. Any strength should be a selling opportunity. Tomorrow might be a non event, but Friday is the end of the week and the month. I should have some exciting monthly charts for the weekend.

Transports

Double top in the transports with a target close to its 38.2% retracement.

Airlines Index:

Here is the Airlines Index, XAL. I like following the airlines since they seem to have a mind of their own. They can be very profitable and often go up 100% on major market moves. The reason they are allowed to do so is because they go down pretty hard as well whenever the market turns sour. You can notice in the 3-Day chart above that they don't really have the normal swings/consolidation seen in other stocks. They typically either go up or down. Right now, they are picking up steam to the downside, I wouldn't be a buyer until 22 even if I was bullish.

LZ Update:

I'm still watching this one like a hawk. It seems every time I update its back to the same price. Lets watch that red line. A close beneath there on Friday will be very bearish. We have plenty of time to get into this one, as it has plenty of room to fall.

Portfolio Update

2009-10-28T12:12:00.000-07:00

Another month has gone by and what a month it has been. I have been all over the place interviewing for jobs as I graduate from college (in fact right now I am in New York's La Guardia airport right now) and so my portfolio has been feeling a bit neglected - and the numbers show that too!

YTD Return:	5.10%
Month's Return:	-2.07%
Number of Trades This Month:	47
Back Ratios:	2
Calendars:	4
Stock Trades:	15
Straddle:	1
Vertical:	1
Adjustments:	24

As you can see most of my trades were adjustments to outstanding positions and I mainly focused on exiting my trades. Reflecting that is the fact that I only have 7 positions open right now and most of those are fairly simple trades. As I mentioned I have been busy this past month and next month is not looking good either (must enjoy last semester of college!).

Most of my trades were profitable or break even and some even returning close to 300%. What really brought me down was a calendar spread I had on Total Inc which for some unexplained reason jumped like 7% in a day that hit me for a $1700 loss - compare that to my total loss of close to $800. Unfortunately, this was 2 days before October expiry and so I could essentially do nothing about the trade. I simply should have hedged myself against a possible jump like that, but then my return potential would have been nearly nothing. I had nearly 80% probability of profit and less than 5% chance of losing more than $200. Sometimes you do everything right and you still lose.

My current positions are mainly volatility plays because I strongly believe volatilities will rise (already up around 30% in the past week! I called that last week! If you are wondering what my target for the VIX is: 30.50). I am also net short on the SPY (have been since last week) and so that is making me decent profit.

I will try to post more of my trades here and my strategies behind them. I think it helps me make better decisions as well as learn.

That wraps up my October update. Good luck and happy early Halloween.

-By Wown
StockJockz.blogspot.com

Trendlines and Such

2009-10-27T19:26:00.000-07:00

Updated Dow Jones chart. I've done a lot trying to determine which trendline we should be watching. Each index has a different trendline and in different scales. Most are starting to break, in fact the SPX and Nasdaq Logarithmic trendlines were broken on the last dip.I believe the blue trendline on the DOW is the most important however because of the fact that it has had 4 touches now.

The transports continue to show weakness. We certainly don't typically go up very much the next day with a chart looking like that. I'm looking for a possible test of the double top support at 3655 tomorrow and a bouncer higher. Otherwise any more weakness will hint at 3400 within a month or two.

EUR/USD:

Long term EUR/USD shows a possible retest of a broken trendline. If this is truly what it is, expect new lows/possible retest of 2002 in the EUR/USD in the upcoming months.

I switched to the EUR/USD from /DX because I didn't like the data feed for TOS for the futures contract. I believe this should be closer to the true trendline you should be watching. It should correlate well with the Dow Trendline above.

Long Term DJIA Chart

2009-10-27T02:15:00.000-07:00

Yearly Chart

I attempted to come up with a price target by drawing a channel that markets the very lows of the major recessions/depressions. These price dates 1942 and 1974. They seem to draw a pretty decent channel. I then noticed that every major downturn in the market has started at or above the channel and then has not ended until it touched the bottom of the channel (this is in fact the definition of a channel, but....). With that said it would make sense to me that we should touch the bottom of the channel which correlates to around 5000 in the DJIA by 2012.

Another Way:

Stars have aligned, how far do we go?

2009-10-26T17:48:00.000-07:00

Today we saw a nice bounce in the dollar, perhaps even a reversal, which sent the Industrials swinging from up 100 points at the open to closing down 104. That would be a 204 point drop intraday controlled by the bears (mainly occuring all within an hour's timeframe). These are some strong selloffs on heavy volume to fuel this downturn in the markets.

Market Breadth and Trendline

My breadth ratio signals the heaviest downward breadth in the markets we've seen this entire rally. We've had two back to back 7:1 Down days in regards to NYSE Up to Down volume. Even SPY volume hints at distribution over the past 4 days, which has shown a significant boost in volume to coincide with this selloff. With that said I cannot rule out further upside until the trendline breaks. I'm hoping we see a gigantic selloff on the break and not another fakeout. That trendline seems to be something everyone is watching, very similar to the head and shoulders back in July. We all know what happened then.

The 61.8% Retracement

Going through my charts I noticed that the QQQQ's touched their 61.8% retracement to the penny on 10/21/09. I believe you could try buying puts here and while setting the stop at 43.82. The bullishness behind the big technology companies is still evident in the market. Eventually it will fall like the rest.

Transports

The transports never made new highs as I've posted before. Their chart continues to look more bearish each day and is dangerously close to breaking the trendline.

Silver vs Dollar

This is how most commodities looked today, including the EURUSD.Everything got slammed while the dollar was only up less than 0.70. Imagine if the dollar goes up $3 what will happen. There was once 3% bulls in the dollar, this also correlates well with the time Gold was all over the news. There is obviously a ton of short interest on the dollar which should create a massive short squeeze. You can bet that the institutions have made some pretty large bearish bets on the dollar by buying commodities. In addition, to the retail investor the only option to shorting the dollar is UDN, which barely moves and is not leveraged. Therefore you can bet any retail investors who are trying to play the dollar are in the commodities. If there is a short squeeze all commodities will see an equal effect on the downside.

TD Sequential

Charted above is the SPX Cash Index and the Nasdaq E-mini. Both have posted 13's on the weekly. On the daily (top picture) the SPX posted a TD Setup 9 to coincide with this weekly 13. This is just further evidence that the top may be in.

1987 Market Crash vs 2009 Market Rally

1987 TD Sequential

Another Possible Reversal Day

2009-10-21T23:19:00.000-07:00

S&P E-Minis

Yesterday I posted stating that the /ES had been forming a series of upward tails in combination with market breadth diverging downwards. Today's market action played into this scenerio yet again, on the S&P E-mini we formed another candle with a tail and a pretty bearish close.

SPX Cash Index

The SPX cash index looks a lot more bearish. We have formed what is called a bearish outside day reversal, when prices reach higher highs then yesterday and then end up closing below yesterday's low. The last time we had this occur was 09/23/09 and we all know what happened there. Its amazing how similar this month has looked compared to the last. We had huge drops on the 1st of the month, slowly rallied up to make new highs, "broke out" of the last trendline resistance (blue line charted above), drifted sideways with downward volume picking up, posted bearish outside day reversal patterns, and then sold off (assuming this occurs tomorrow or Friday). It seems this last rally was pushed higher by gaps higher in earnings. However not everything participated and made new highs.

Dow Transports

Dow Transports never confirmed the Industrials new high and had a huge selloff today fueled mostly by the Airlines. You cannot look at that chart and say it looks bullish whatsoever, looks like a clear double top to me.

The Dollar

I won't go over the VIX because it was already covered in a previous post, however the dollar is due to breakout here sooner or later. It is sitting right at support, making what Elliott Waver's believe to be its last moves before a major rally. If this market can go down today with the dollar going down, just wait until [if] the dollar starts to pick up some steam. Tomorrow I would like to see a rally to confirm a push lower in equities.

1938 vs 2009

Two posts ago, I mentioned how I would like to see the NDX-100 futures hit its 61.8% retracement. I was hoping that the target was hit but after yesterday's post it appeared as if we hit some resistance. Although I was looking for a bit more upside, I believe that scenario is thrown out the window unless we see the highs of today taken out by the end of the week.Although it doesn't chart as nicely, if you pull up the NDX-100 Index (charted above) you will see we came within 0.30 of the 61.8% retracement (1780.83 vs 1781.13). Thats good enough for me. I believe this is a huge development and it plays out nicely for the bears. Charted above is the NDX-100 vs the Dow Jones Industrials of 1937-38. The 1938 retracement rally came up to the 61.8% retracement before heading lower. In addition the SPX of 1938 went to its 50% retracement, which is pretty similar to what has occurred in today's market as well. In addition if you match up the march lows in both charts, our high was supposed to come in around 10/18/2009. So time and price match up on the weekly scale.

Cycle Chart

Here is an update of the cycle chart I posted. When I originally posted I mentioned this chart has defined many of the major key reversal dates in the market. The only one that didn't work to perfection was last May. It happened to mark a high but prices quickly rallied higher to the major bear trendline charted above in red. This happened to be the ending of Wave 2 of Primary Wave 1.It is possible that we are nearing the end of Primary Wave 2, and today's date would play in perfectly for a similar scenario to play out. There has already been some talk of this important fractal within the Elliott Wave community. It is funny I can remember being pretty bullish on Apple during last April/May, after what I had thought had been a pretty significant decline in the indicies. They ended up posting good earnings along with Google and both stocks seemed pretty bullish at the time. Soon after, a high was made and Apple never looked back, and the market sent it to $78 a share. Now prices are even higher than last May after even better earnings, but it may be time for it to go back down again.

Lubrizol Update

LZ which has been my short candidate that I've been covering has really underperformed in the past week. It broke its trend and could not regain it. This does not mean a breakdown yet, but the trend has slowed. A possible double top might be occuring. Huge resistance is defined by the red line. If prices started drifting below there it might be time to start a position.

On one last note, I forgot to look at Sequential today to see where we are at on the count. I should have an update on how the indicators look tomorrow.

-MarketMike
StockJockz.blogspot.com

A look at the VIX

2009-10-21T06:58:00.001-07:00

Notice the blue support line and how the VIX has bounced FIVE times off of that level. We are quickly approaching that point again. Also, the downtrend has seen 1,2,3,4 waves down already and so the 5th wave down would reach the blue support line and then we could see a turn around. Finally take a look at the sudden reversal in the Stochastic indicator which is now reaching all time oversold levels (The chart does not show trading levels - when I say "oversold" I mean the bearish momentum is very low).

-Wown
StockJockz.blogspot.com

Interesting Development in the Futures

2009-10-20T18:23:00.000-07:00

Tails on a candlestick usually help define a rejection in price. Consecutive candlesticks with tails give an even stronger signal. The chart above is the S&P E-Mini Futures Contract. The S&P Cash Index does not look similar. In fact the S&P Cash looks like it is perhaps consolidating, however the tails on the Futures hint that a top is near as prices have found resistance. This signal has worked since the rally began. Also to note is divergence in the indicators. Recent breadth has broken down after failing to make a new high despite prices doing so. When I first made this indicator I stated it seemed to point out when a rally is beginning to reverse and starts heading down before price does. Lets see if this does occur because this will be the first time this has happened since I've developed the indicator.

With all of this said, I still think the market has room to run. I really like the chart I posted last night of the Nasdaq Futures. If we can somehow manage to reach that 61.8% retracement on the Nasdaq while maintaining a string of tails on the /ES I believe that would be a gift for bears. That would be the perfect scenerio. Another scenerio I could see would be prices slowly drift down 30-40 points a day, perhaps maintening doji type formations, and then we have a strong down day, perhaps as early as friday. But now I'm just pulling strings. So lets see what happens. I will stick with Elliott Wave one last time and say that our next pullback like the one we saw in the beginning of this month, will be the real deal and we will see 900 before we see 1200.

Market Update: A Look at the Nasdaq Futures

2009-10-19T18:20:00.000-07:00

Apple came out with a ~21% surprise in earnings, enough to push it to all time new highs. As if the stock going from $78.2 to $192.32 wasn't enough to say that Apple will have great earnings, wall streets love child is now pushing levels above $202 after hours.

The chart above is the Nasdaq 100 Futures Contract. I've highlighted where the Fibonacci retracements have served as resistance and support in the past. In fact this looks a lot better than the S&P's retracement levels. I'm also not a fan of using the same indicators as everyone else as I do not believe the market plays in the favor of the majority. With that said I've already made it known that the 61.8% retracement is my next target for the market. When I originally calculated corresponding target prices, this coincided with 1098 S&P, however the Nasdaq has lagged the S&P since and allowed the S&P to surpass these levels.

There is plenty of other resistance overhead, but this one will be key to watch. Tomorrow should be good day in the markets as S&P futures are up 0.41% at time of writing. However a gap up and a close below the open is a very bearish sign. Lets see what happens tomorrow, it should be very interesting.

Short term outlook on SPY

2009-10-16T12:18:00.000-07:00

A few days ago I talked about why the market rally is unsustainable from a fundamental perspective. Here is a chart that shows why I believe the market should see a correction very soon.

At first glance the chart may seem messy but it has a lot of information and I have left ALL the major technical levels on the chart.

Firstly, pretty significant resistance area has been created in the 110.5-111 area which obviously we have not reached yet. If we were to break through this resistance, the next level is between 115-117. Honestly, I do not think this will happen without a correction. My belief is based on the other studies on the chart.

The time studies show that there is a very high probability that by 10/19 the uptrend should reverse. 10/19 is the strongest "time resistance" area on the chart. Even if that area is broken, the next very strong resistance area is 10/23-24. Either way, the time studies are indicating that there should be an end to the uptrend within the next week. Also, following a High-High time cycle, we should see a high between 16-25 days from the previous high. We are already 20 days since the previous high. Clearly, the time studies are indicating a reversal very soon.

Next, the Stochastic indicator has made a double bearish reversal in the overbought zone. This is a very bearish sign and is usually followed by a significant correction. However, if you look back on the above chart to 7/13 to 7/28, the Stoch made multiple bearish reversals and the correction never came. A counter point to this argument is that 7/13 to 7/28 was the middle of wave 1 while we are in wave 5 (see chart). This means that the bearish probabilities are much higher.

Finally, using the breadth studies that Market Mike created, you can see that within the last 2-3 days, the breadth has dropped 10 points. This is indeed very bearish because it means that the number of sellers is increasing significantly. This is NOT accompanied with lower volume (not shown), which gives this bearish indication some conviction.

If we do see a reversal, how far can we expect to go? According to the basic Fib studies, the first support area lies at 101.17. That is a drop of nearly 10%. Based on the high probabilities of a bearish reversal and such a low support level, I have traded a 108/117 2:1 put Back Ratio (see my post about Back ratios for clarification on this).

Here's to hoping the market crashes... Cheers!

- Wown
stockjockz.blogspot.com

10 Different Views of Technical Analysis

2009-10-16T01:41:00.000-07:00

This is going to be a lengthy post that attempts to cover a good portion of what I've learned so far in Technical Analysis after doing it for nearly 2 years and how I see it being used in the industry. Technical Analysis is constantly evolving and it is quite evident that there are tons of different methods available to use.

We all have our own preferences and everyone of us have our own way of practicing Technical Analysis. The reason why everyone doesn't use the same indicators is because not one system works on its own. I believe people unsuccessfully continue to search for the indicator which will give clear buy and sell signals. Not one indicator works 100% of the time, but if you use every tool available to you, I believe Technical Analysis can help increase the odds in your favor.

If there was one indicator that worked then we'd all probably be millionaires by now, or I wouldn't be posting about it on the Internet telling you about it. As people become more aware of Technical Indicators I believe they become less reliable. On the other hand, I believe if enough people look at the same indicator that it will become a self fulfilling prophecy and serve some type of importance. For example, the 20 day simple moving average. I believe this has to be the most widely watched indicator. I guess this is supposed to represent a moving average of 1 months trading. You often hear how prices will "bounce off the 20dma." Why do you think this is? Is 20 some magical number? I believe it has become a psychological level that if prices approach the 20dma that you need to take action. A lot of Technical Analysis is about market psychology, something even I'm still learning myself.

What I'm about to cover are the different 'levels' of Technical Analysis. Please ignore the names that I've given, but just understand the fact that I believe the sophistication of the analysis becomes greater as you continue to read. A lot of this post is going to be able my personal evolution as a Technical Analyst.

1) The Rookie Technician

Tools:

Volume Histogram
OHLC bars
Price overlay: 20,50,200 Simple Moving Averages

This previous discussion leads me into the most basic form of Technical Analysis. I believe anyone who at least attempts Technical Analysis employs these strategies and watches these indicators. This person watches volume to see if its heavy/light and follows trends by looking at the moving averages. They may use the moving averages as support/resistance but more likely would rather look for crosses in the moving averages. I believe we all started here at one point.

2) Basic Support/Resistance Technician

Tools:

Candlesticks
Horizontal Price Levels
Volume Histogram or Volume by Price (not shown)

Using horizontal levels to define support and resistance is very common place. It was very common to hear last year on the media as we continued to go lower that the DJIA was about to test key support at such and such price. They simply pulled up a longer term chart and tried to find extreme lows as I did above. Obviously prices don't come exactly to these price levels all the time, and other times they go further then these price levels. A key to drawing these levels are to try to connect as many closes/opens/lows/highs as you can. This is much easier to construct using a candlestick chart. Using volume is also helpful to identify your pivot points (extreme highs/extreme lows). For example if you see a day with an exceptional amount of volume, it was obviously an important day and prices attracted enough people to take action. You can expect these same price levels will attract investors as they approach again.

3) The Basic Technician

Tools:

Colored Volume Histogram
Candlesticks
Price overlay: 20, 50 Exponential Moving Averages
Price overlay: 200 Simple Moving Average
Favorite Oscillators: Typically 2 or 3 of the following: RSI (14), MACD (12, 26, 9), Stochastics, ADX/DI, etc.

The Basic Technician takes it a step further and now incorporates a group of basic indicators to assist in his/her trading. Initially they will go by the book and attempt to trade the oscillators as they were originally designed. For example, buy below 30 RSI and sell above 70%. Obviously they come to learn this doesn't always work and they soon come very familiar with other strategies such as divergences and making custom adjustments to the indicators. In addition they gain a basic understanding of candlesticks and employ a faster set of moving averages by using the 20 and 50 Exponential Moving Averages.

4) Trendline Technician

Tools:

Trendlines
Channels
Volume Histogram

By now I've described what I would guess would be about 40-50% of the technicians out there. I believe most people who do basic technical analysis won't go any farther then what I've described so far and are content with just drawing price levels to try to identify areas of support/resistance. However if you are going to be a successful trader it might be useful to incorporate trendlines into your analysis. As I described above, prices rarely go down to a specific price before deciding its time to reverse. However prices do tend to stay within their trendlines fairly often. The key is drawing the trendlines properly. Using volume combined with price action is very helpful in doing so. Channels are very useful and are used by the most experienced technicians, including those who practice Elliott Wave, to identify both key support and resistance levels at the same time.

5) Pattern Technician

Tools:

Trendlines
Knowledge of all patterns
Volume Histogram
Oscillators (not shown)

By definition every technician tries to look for patterns in order to forecast future price movement and I'm sure everyone has visited Investopedia's Chart University at least once. However there is a certain degree of sophistication required to identify true patterns. It takes time to develop the knowledge of patterns, their targets, and signals of a true breakout. Experienced technicians in this area can glance at a chart and immediately point out patterns without giving much thought at all. However as I've said before the more people that know about a specific pattern the more likely it is to fail. I've seen so many head and shoulder's patterns fail recently, so it is important to use other indicators such as oscillators and volume to confirm the price pattern. Also these technicians come up with their own breakout qualifiers and wait for confirmation before taking action.

6) Fibonnaci Forecaster

Tools:

A Platform which has all tools available
Fibonnaci Arcs, Time Ratios, Retracements, Retracements, Extensions, Fans
A knowledge of the Fibonnaci Ratios and Sequence

I believe Fibonnaci is the most important aspect of Technical Analysis and is probably the most helpful in forecasting the markets. The degree of sophistication here is determined in which tools you use and how much time you put into your analysis. A simple retracement is done by everybody, but there are so many other tools available that all base themselves on the Fibonacci ratios that not too many people use. For example I don't read up too much on people using Fibonnaci Arcs but I believe they can still a useful tool. The key is finding the right points to connect to and seeing how the tool has worked in the past. If it played a significant role in the past, probabilities are you can count on it working in the future. For example if you would have drawn the Fibonnaci Arc above and saw that it acted as resistance in March 08 and October 08 you could have kept a close eye on it and done a pretty good job predicting the low in March 09. I came across this Arc yesterday, and it will be important to continue watching it going forward.

7) Elliott Wave

Tools:

Good knowledge of all aspects of Technical Analysis
Knowledge of the Wave Patterns and the 3 Rules of Elliott Wave
Fibonnaci Tools and Time Ratios
Channels
Oscillators
Volume
Divergences

Now that we've moved fairly far down the list we've moved into Elliott Wave which is on the top of my list for difficulty and sophistication required to perform the analysis. There are only a few good analysts out there who have valid counts but many people pay for this information. I know instititions do follow Elliott Wave despite how subjective it is, because it is evident even in the chart above that it works. Elliott Wave attempts to explain that the market moves in waves bounded by Fibonnaci. For example notice above how corrective wave 4 is 61.8% of the size of corrective wave 2. Also Wave 3 is 123.6% of Wave 1. Although not annotated in the chart above, price projections can be performed in a similar matter.

8) Cycle Forecaster

Tools:

Cycle tools
Time Ratios
Knowledge of Calendar Cycles and Dates

There seems to be tons of indicators available on price since price is what drives your return on an investment. However cycles and precise timing seem to be overlooked and very difficult to find information on. Even I cannot comment too much on this since I have yet to study much on the use of cycles. However there are plenty of services out there that claim they know the dates in which the market will see a turn or begin reversing. Its up to you whether you believe them.

9) Demark Technician

Tools:

A valid charting platform
Demark Indicators

I recently came across these indicators and there doesn't seem to be much information on the web about them. However I believe enough research has went into the indicators and they work impressively enough to be put in their own category. Developed by Tom Demark, the most popular and probably the most useful is his Sequential timing indicator. Although there has been development through other platforms, I believe the Bloomberg Terminal has the most correct versions. Unfortunately your average investor cannot afford such an expensive tool but you can be sure all the institutions keep an eye on Sequential.

10) Custom Indicators

Tools:

A creative mind
Programming ability
A platform that allows for custom indicators

Everyone out there wants to make money. Some of us are not content with what has been provided and try to develop our own indicators. Shown above is a version of Guppy MA of which I found somewhere on the web and I apologize ahead of time for not giving credit to who developed it. I believe it does a great job of pointing out the current short term and long term trends. Also I've overlayed a simple Bollinger Band which is another indicator that many people use. Using all indicators in unison can generate positive results.

I've gone through a list of 10 different ways of looking at Technical Analysis, but the truth is there are unlimited ways to analyze the market. Somewhere in between all the discussion above is the analysis of market internals, sentiment, volatility, and so many others. There are also plenty of other indicators and tools that I do not mention because I do not have much familiarity with them. Probably the biggest are the Gann tools and the use of other tools such as Andrew's Pitchfork. Perhaps sometime down the line I can include them in this post after I've had some experience with them.

Market Update: A Look at the Major Index Charts

2009-10-14T18:56:00.000-07:00

Dow Jones Industrial Average:

With the Industrials now above 10k and the S&P breaking previous highs of 1081.15 we now have to look for the next area where prices will begin to start reversing. Here is a chart of the DOW showing some major resistance overhead including the 50% retracement and probably the best way to draw the major downward trendline form the highs.

Dow Jones Transportation Average:
Still plenty of room to go until new highs. Has some pretty significant resistance to overcome to get there.

S&P 500 Index:
Upside appears limited. If I had to make a call, I'd say we have a slightly positive day tomorrow and a reversal start Friday.

Nasdaq 100:
I believe this is the key chart to watch. Plenty of resistance overhead including a major 61.8% retracement.

Nasdsaq Composite Index:

Over-optimism setting stage for a crash?

2009-10-14T12:39:00.000-07:00

The big news on Bloomberg today: U.S. Stocks Rally as Dow Hits 10,000 for First Time in Year . Spurred by the positive earnings report by Intel and JP Morgan, the market continues its rally to new highs for the year. Seems like every company out there is beating the EPS estimates. I read an article which mentioned a survey that claimed that 80% of Americans think that the recession is over.

I have also been looking at some charts I get through various newsletters and many claim that we have broken important resistance levels. Levels like the 50% retracement from the highs of two years ago and important fibonacci extension levels of the first recovery wave have been broken. Next important resistance area lies in 10,500-10,800 for the DOW.

Great! Let us all go out and load up on stocks because if we don't get on the bandwagon up, we are sure to miss out on an excellent opportunity.

But, an intelligent investor will ask if this rally makes any sense. Let us take a look:

GDP
The S&P has rallied a whopping 62% since the lows in March. How has the overall economy performed in the same time period?

Well from Q1 to Q2, the US GDP shrunk .1%. In the same time period, the S&P rallied 41.7%.
Q3 GDP growth is estimated at 3.4% while the S&P has rallied 14.7%. At least the divergence has shrunk.
The growth outlook for the next quarter is .3% and if we are to believe the 10,500 target for the DOW, the market will rally another 5%.
The conclusion I draw from the above numbers is that the rally is definitely overinflated and has little economic basis.

Earnings
When the market crashed last year, the analysts cut their EPS projections to abysmal lows. Now, when the economy is on the path to slight recovery, is it any surprise that the companies are beating their EPS estimates? When your EPS estimate is $1 and you make $1.1, are you truly performing that well? I have seen many companies' stocks jump 5-8% when they beat their earnings by a mere penny.

It is somewhat ridiculous to see stocks extending their rallies on such modest EPS reports just because they beat the analysts' estimates. According to various sources, the average P/E ratio is now in the 140 range! (I must admit that 140 seems ridiculously high and if I get time, I will calculate it myself and check the validity of the above claim).

Overall, I think the economic validity of this huge rally is at the very least questionable. The more we extend this rally without a significant correction, the more wary I get. Of course I am a little bitter today because the unexpected pre-earnings jump in many of my positions caused me some big losses. In any case, until I see some strong economic growth numbers or a reduction in the P/E ratios I will be very careful in entering any new long positions.

- Wown
stockjockz.blogspot.com

Market Update: A Few Quick Points

2009-10-13T19:13:00.000-07:00

Summary

As we know the market has been in a pattern of rallies and pullbacks since July. Each pullback has gotten larger as time has progressed, and due to the most recent pullback that sent the S&P from 1081.15 to 1019.95, more fear is starting to come into the market. The market has stalled near the 1080 level with more talks of a double top. However it looks as if INTC earnings have pushed the futures to new highs, don't be surprised to see the market up pretty significantly tomorrow on a gap higher. My action on the market is relatively neutral at the moment as there is too much risk to be going long, and also too much momentum and earnings surprises to make me want to go short. I do have to say I'm getting tired of the market only being up 20 points a day, I miss the volatility and the days whenever 200 points was the norm.

To comment on the chart above, the S&P is still finding resistance at the old trendline. The problem with this trendline is the slope is so steep that the market can still go higher each day and still be contained under it. So the only significance that this line holds is that it shows the upside should be limited. With that said, there is room for the S&P to reach 1083-1084 tomorrow and still be under this trendline.

Also a quick comment on recent market breadth. Up until today, for 6 days straight, the NYSE up volume had outpaced the down volume. The overall volume during the recent upside has been very light. The breadth ratio is also showing pretty significant divergence as prices have moved higher but the ratio remains in the .56-.60 range. The last peak on the ratio was seen at .74. However this divergence could also mean that the market still has room to run as there are plenty of buyers left on the sidelines.If the buyers do decide to come in over the next few days and we have a few strong days to the upside, the ratio could very well get above .70 as it has done in the past.

ProphetCharts

I posted this chart a few weeks ago noting that the 50% retracement (at 108.14) and gap fill was approaching on the SPY. This didn't make sense at the time because the 50% level on the cash index was at 1121, not 1080. Well I've recently found out that Prophet adjusts their prices for dividends. I believe stockcharts and other platforms may do the same thing. This is just something to keep in mind when using these platforms. Interestingly enough the 50% level is still serving as resistance as the recent highs on the SPY have been 108.03 on 09/23 and 108.03 on 10/12.

Lubrizol Short Call

I recently made a post stating that I believe that LZ looks like a good short candidate. The stock hasn't broken down like I had expected because the market has recovered, however I still believe upside is limited. Similar to the S&P, LZ is retesting a broken trendline with bearish divergence on all indicators. The black lines on the price chart represent a channel of resistance that has held since the 1970's. Everyone has different risk tolerances and different ways to play a position. I suggest either waiting for the market to give a clear signal that it has broken down or by building a position in this stock by starting with a fraction of a position and adding to the position at key resistance levels if price moves against you.

-MktMike
http://stockjockz.blogspot.com

SYNJ offering a 2% dividend on 10/19 & more

2009-10-12T16:49:00.000-07:00

We are now a week away from a common stock dividend of 2% being offered to shareholders concurrent with the record date of October 19th. My suggestion for playing this stock is much similar to how I play forward splits. I decided to pick this stock up today, on a down day, before the excitement begins, that way I am in a good position to play this thing according to how it acts this friday and early next week.

Also, for those following, as you have probably realized, my recent 'sure thing' NHYT has bounced around, and although it has shown signs of resistance I am still bullish with this stock. Green products, especially those in the automative industry, are getting a lot of attention right now in the media and government and it is only a matter of time before they take off!!! I also suggest keeping an eye on SCLZ (stem cell assurance) which garned a nice 56% gain today on heavy volume and suprisingly NO NEWS, something might be waiting to happen here! Good luck to all those scavanging the OTC's!!

UNG Short Butterfly

2009-10-12T09:31:00.000-07:00

UNG is the ETF that tracks Natural Gas prices. The trade that I am about to illustrate below has more to do with options volatilities and less to do with the actual price action. Thus, I am not including some of the technical analysis I did before entering the trade.

Price Action Analysis
I think the following few lines illustrate most of the major points that are important regarding the price action. Firstly, in the past month we have seen a sharp price reversal followed by a couple weeks of consolidation. I believe the consolidation should end soon seeing as how Winter is around the corner. Natural Gas demand generally increases in the Winter months - that would explain the sharp increase in price in the previous month.

A short lesson in volatilities
I am including this section to explain the meanings of all the different volatilities:

Implied Volatility(IV): An option price can be calculated using a model like the Black-Scholes or the Binomial Model. The implied volatility can be calculated using any of these models and reflects the markets conviction about how much the underlying security will move.

Historical Volatility(HV): The annualized standard deviation of the price in a given period (I have used the 30-day and the 90-day HV).

Historical Implied Volatility: Basically the IV of options traded in the past. Good to compare what the IV of an underlying has been in the past. The difference between HV and the historical IV is that the HV is the actual volatility recorded while the Historical IV is what people in the past thought the volatility would be.

What does this mean in tangible terms? The higher the IV, the higher the option's price. So, if the historical IV is higher than the current IV, it means the options are selling for cheaper today than they have in the past.

Implied Volatility vs Historical Volatility
As I mentioned, the trade below has more to do with my convictions about the option implied volatility than with the actual price action. If you look at the Avg Imp Volatility (IV) chart (which is the average of all implied volatilities for the front month options traded for UNG, weighted by relevance of the option), you will notice that it has plummeted within the last month. In contrast, 30 day Historical Volatility (HV), the annualized standard deviation, has risen and the decline in the 90-day HV has been a lot slower than the Avg Imp Volatility.

The above divergence in HV and IV is what prompted further investigation. I looked at the IV for the option trading in April expiring in July 09, the IV for the option trading in July, expiring Oct 09, and the IV for the option trading in August and expiring in Nov 09. The average IV for these options was 68-70%. Compare that to the IV for the options I traded ( 45%, 46%, and 53%). Clearly, the IV are much lower right now than historically they have been.

Trade Hypothesis
As I mentioned, basically this means that the 3-month out option is trading for much cheaper today than it has in the past. This I found to be weird seeing as how the price has been consolidating and should rise more in the winter.

Thus, I think the option price, in conjunction with the IV, should rise in the coming months. So, using the most basic conventional wisdom, buy low sell high, I entered into the following trade.

The Trade

You can see the actual trade on the chart above (under "Positions and Simulated Trades"). The risk profile shows what happens if the IV stays the same. As I mentioned I expect it to rise so the chart above is the worst case scenario.

My max loss is close to $350 (on 12/11 - I will not be holding this to expiry). I am expecting a max profit of around $500. A realistic profit would be around $300. If UNG breaks above $17 and stays there until Jan, I will make $975.

If the IV stays the same, I have a 47% chance of profit by 12/11. I think a more realistic chance of profit is 60% based on my hypothesis (As a side note, I really need to make a model that lets me calculate probabilities on expected IV).

- Wown
StockJockz.blogspot.com

Market Update: Where to next?

2009-10-11T15:00:00.000-07:00

Summary

We've seen yet another bounce since our recent dip fueled by the earnings of AA which surprised with unexpected higher earnings and revenues. In addition, it appears as if all of the major banks just need to upgrade the big players and the stock market rallies. On the brink of a breakout, IBM was upgraded on Friday to $140 by Barclays and rallied 2.98%. Other big technology names were sent higher with the news including BIDU which has reached new highs ($427.07, +3.49%). BIDU is only 3 points from making All Time New Highs, amazing isn't it?

Sometimes I have to question the timing of the analyst upgrades, its a little too convenient that they come out right at resistance or at a key break of support. Also where are the sell recommendations? Even if they are out there, it seems you never hear of them. UBS recently downgraded a group of financials including WFC, but of course you never hear this on CNBC. I had to find it on a blog post under a user comment section. Even a simple news search of "Barclays IBM" produces many more relevant results on Google News than "UBS Wells Fargo". On 10/02/2009, UBS upgraded Apple, and despite the market being down, Apple soared 2-3% after forming what appeared to be a head and shoulders breakdown on the 60m that would have taken the stock down to $170. On 10/08/2009 UBS issues its sell on Wells Fargo while the bullish momentum is strong and the stock drops less than 1%.

Testing a Broken Trendline

Here is a chart that makes the argument that we are only retesting a broken uptrend in the SPX. The retest is confirmed by volume which has been significantly lower on the upside. I think everyone should now be watching this trendline closely. It significantly lowers our upside potential without a drop early in the week. The good thing about this trendline is it charts well both in Log and Normal scale, something I've recently been indecisive about when deciding which one to follow.

Here is how the last one played out on our previous dip. However, note the lack of heavy selling volume. Also something very interesting to note is the very "bullish" candle on 09/16/2009 which appeared to breakout of several trendlines. This seems to summarize the market as of recent to me. If things begin to look too bullish, its time to sell and is one reason why it is tough for me to buy breakouts.

1938 Industrials vs 2009 Nasdaq 100

1938:

2009:

Here is another set of charts comparing the 1938 and 2009 scenario. Remember both of these have looked very similar in structure for over 10 years. The 1938 recession rallied up to its 61.8% retracement level. That is only 2.5% away on the NDX-100. That would put the Industrials around 10060, the SPX around 1098, and the TRAN at 3970. This will fit nicely into Dow Theory because the Transports will not confirm the Industrials new high. This also allows for the SPX minimum new high target to be reached of 1098.

Head and Shoulders Continuation Pattern

2009-10-10T01:55:00.000-07:00

Originally I was making this post to argue that a head and shoulders is a reversal pattern and not a continuation pattern. However now the post is going to become a quick lesson. Going by what I've learned in the past I've always thought this was true, because such sites as Investopedia, where I originally began stated so. But after doing a recent Google search I've come up with a few Google book results which have cited the head and shoulders as a continuation pattern as well. The book that I link to is authored by John Murphy, a reliable resource in my opinion, and also author to the first technical analysis book that I've read. So apparently it is in fact a valid continuation pattern.

Anyway here is the example charts I was going to post. If you'd like to believe in the [inverse] head and shoulders pattern and be bullish on these two ideas, you can go right ahead. I cannot fathom either of these patterns reaching their targets though.

HEAD AND SHOULDERS REVERSAL

The first chart is of EMR, Emerson Electric Co. This is clearly a very valid inverse head and shoulders breakout, except the volume isn't necessarily exactly confirming.

HEAD AND SHOULDERS CONTINUATION

The second, which I originally thought was an invalid use of the pattern, is in Gold. Possible target on Gold lies at 1300 if this is truly an inverse head and shoulders.

Quick Update With More Charts

2009-10-09T01:40:00.000-07:00

Latest market action has peaked my interest so I've made up a few extra charts.

Nasdaq Composite: 61.8% Retracement from 91 Low

Nasdaq Composite Closeup & Elliott Wave Count: The end may be near.

Major Cluster of Resistance in the QQQQ's:

High Probable Down Day Tomorrow

2009-10-08T21:27:00.000-07:00

Typically a white candle (where the market gaps down and closes above the open) is one of my favorite bullish candles. A black candle is just the opposite. Nothing is for sure in the market, we know this, however typically a black candle is a topping candle, especially if it has a shooting star formation. Although the SPX looks nothing like this, the NASDAQ is showing relative underperformance with a black shooting star. A black candle occurs when the market gaps up but ends up closing below the open. So far in the P2 rally every single day we've had a black candle we've seen a pullback within a few days, more likely than not starting the very next day. If you look back during June's pullback it looks very similar and you can also see how the index pulled back a good 3-4% afterward. I've highlighted the chart below in yellow for you to see. Also note the XLF, the financial sector ETF, has a similar candle. Tomorrow is also the last day to save the old highs. A bullish day and I'm sure we'll see 1098-1120 before 1000 breaks.

Update: Neutral Tandem

2009-10-08T08:18:00.000-07:00

This is an update to the TNDM Trade I entered about a week ago.

Trade Summary
I shorted the stock at 22.60 and got out of half my position at 21.22 and the rest at 22.15 when the stochs made a bullish reversal (orange circle). Made a decent amount of profit on the trade.

Current Situation
The stock is still on close watch for me because although it has gone up recently the bearish signs are still pretty strong (see below). As I had mentioned in my original post, I believe we will be seeing an ABC correction that is an overall wave 4 of a 5 wave downtrend (marked on the chart). So, essentially, I got in on the top of wave 4-A, and got out at bottom of 4-B. We are now going on 4-C. I believe 4-C should be coming to an end soon - my time series analysis said that it should have ended by 10/7. My next target is 10/15, but it could happen any time because I do believe the correction is a bit overextended.

Bearish Signs
First and foremost, the volume has been very light, and generally falling, since mid-September, showing that there is little conviction in this uptrend/consolidation. I have already talked about the E-Wave aspect of the downtrend that predicts a down move soon.

The candlesticks are moving higher but are colored red. What this means is that the stock opens higher but over the course of the day, the bulls are not able to sustain the stock price and it falls - this is a very bearish signal.

The MA are all falling in conjunction signifying that the bear trend is not over yet and we are still in a correction period.

Finally, the Stoch indicator is bullish. However, we are quickly approaching overbought zones and if the Stoch makes a bearish reversal, I will be shorting the stock again.

You might say that, "Well, the market is going up again and it is generally bad practice to short while we are going up". Although I generally agree with that, TNDM has shown not to follow the rest of the market in the past. On the above chart you can see how the stock has fallen. In the same time period the market has mostly stayed sideways and even risen a little. The beta of TNDM is a mere .5, signifying further that the stock has little covariance with the market.

-Wown
StockJockz.blogspot.com

Market Update: At The Crossroads

2009-10-06T18:06:00.000-07:00

Many of the early earnings reports appear to be surprising. Lets see how Alcoa reports tomorrow, and how it affects the stock price. Should be interesting. Two very bullish days (confirmed by a very high up volume ratio) somewhat negate the possibility of new lows in the near term, but as we know anything can happen in the market.

Notice above the Breadth Ratio has screamed higher the past two days, very similar to what was seen in the past few dips. The question remains, how long will the buy the dip scenario last? Also take note the total volume is much lower the past 2 days, despite it mostly being all up-volume.

Anatomy of the Bear-Market Rally

I thought I would post this chart to show you what my take on this market rally has been. Perhaps this will better explain why the market is moving the way it is. In the chart above, I've marked rallies off the dips in a green box, consolidation period in gray, and the corresponding sell-offs in red. Here is a 3 step pattern that is apparent to me and probably pretty simple explanation of how the market works:

1) Green: The buy programs begin with bulls buying at the dips thinking they are getting good prices on their favorite undervalued stocks. Along the way buy stops are being triggered for all the people who went short. A break of highs triggers a short squeeze, making the entire rally typically equal to the size of the previous consolidation + selloff period (price & time). Breakout buyers then continue the rally a bit higher until the gray area....

2) Gray: This area represents a lack of buying. A battle between the bulls and bears to gain control. Shorts start entering and the people who bought the dips start selling. Some breakout buyers come up with gains, others are trapped and begin to sell.

3) Red: Eventually the sellers begin to pick up (something I've noticed because of divergence in my breadth indicator) and support levels begin to give way. Heavy amounts of shorts begin to enter the market thinking the top is in. Support is reached and the cycle then starts over with green.

One thing to note, due to the volume being heavier recently on the selloffs, there could be two possible reasons that I can think of for this. The volume was much heavier before the rally, obvious bottom-callers were getting into the market, perhaps a bit too early, but at much lower prices than today. (1) Now that they've seen pretty hefty gains they are selling out,willing to call it quits for a while after experiencing pain last year. (2) The other possibility is that the big institutions and hedge funds are beginning to position themselves for a move lower. I believe the volume will only get weaker from here on out on the upside. This makes the most sense to me.

Cycle Chart:

Here is an interesting chart I'd like to share with you. This cycle has marked within a day or two some very significant turning points in the market. This supports the idea that the 1080.15 price on the S&P is much more important then our 1039 high a few weeks ago. The next cycle points to around 12/31/2009. So IF we do go higher, and many price targets lead to 1120 at the max, then we are going to see a very choppy road ahead. The other possibility is we go even higher to the 61.8% retracement which lies around 1230. As hard as that is to believe, who knows it COULD happen, but I doubt it. One other possibility is that we are seeing a retracement rally to retest highs, perhaps a fakeout/capitulation move. We saw something very similar in this cycle in May of 2008, where the cycle marked a significant peak, but not necessarily the true high.

-MktMike

Market Update: Possible Bounce before next move lower...

2009-10-04T18:45:00.000-07:00

I believe the markets may try to recover with a possible rally attempt early in the week. There was some pretty good strength by the bulls on Friday as pricing approached the 1018-1020 level. Watch this level closely, on the 60min SPX chart it looks like a possible double bottom which will ultimately lead to a bounce that I suspect exhausts around the 1035-1040 level around the 38.2% retracement. Volume will be very important tomorrow.

Remember last Monday's rally was on very low volume and ultimately failed. I think the market will give the bulls one more attempt, and they better show up, because any weak showing will give the bears more confidence that the next move is lower. Remember, as I've said before, the beginning of the week/month is not nearly as important as the end. I expect we'll see a new low before the end of the week which will lead to continued bearish action in the weeks to come. With earnings season beginning this week, these numbers better come in pretty freakin' good to support this 60% market rally. Less cost cutting, more revenue growth.

The Nasdaq

To compare to the chart posted above, here is a picture of the Nasdaq. Despite Apple being up 2-3% on Friday because of some ridiculous $250 price target (someone at UBS loves his iPhone a little too much), the Nasdaq still led the market lower on Thursday and Friday. I'm not too sure if this is anything significant, but the Nasdaq has shown relative strength ever since November of last year. If it was a market leader to the upside and a Beta of 1.13 on the QQQQ's I would suspect it would be the market leader to the downside.

Head and Shoulders = Continuation?

Lastly, I've really started to believe in the Head & Shoulders Continuation pattern. After the big one in July in the S&P I've started to doubt the "highly probable" head and shoulders reversal pattern. Here is the chart of the 60m AAPL and the pattern looks textbook. Thursdays EOD breakdown appears to break the neckline, but I guess without the lack of confirmation, and an unexpected target price upgrade, AAPL rallied on Friday right back up to the top of the right shoulder.

-By Market Mike

StockJockz.blogspot.com

Portfolio update

2009-10-02T13:41:00.000-07:00

I am going to post monthly updates on my portfolio's performance. This will help me keep track of what I do well and what I don't. If I lose 20% in one month and I traded mostly Strangles that month - I will know in the future to stay away from strangles.

Month's Return:	7.44%
# of Trades:	56
Back Ratios:	6
Calendars:	13
Stock Trades:	29
Straddle:	1
Others: (Close outstanding spreads)	7

Most of my profit came from the Calendars - however, I still have 5 calendars outstanding and until Oct 16th, I cannot simply bank those profits. The stocks and outstanding spreads from previous months contributed significantly as well.

My most significant losses were with the straddle and some stock trades. However, I did stick to plan and did not have any trade that lost more than 2% of my portfolio.

Overall a good month. I expect the calendars to pay off very well over Oct - as long as the SPY does not fall below 100.

-By Wown
StockJockz.blogspot.com

Short Candidate: LZ: Lubrizol Corporation

2009-10-02T00:09:00.000-07:00

LZ, Lubrizol is in the Chemical Manufacturing business with peers such as Dow Chemical and New Market Corporation. This information comes from Google Finance, but in reality I could care less what they do and who their peers are because I'm basing this short based on what the charts are telling me.

But what the hell, here is the the description of the company if you'd like to read something irrelevent:

The Lubrizol Corporation (Lubrizol) is a specialty chemical company that produces and supplies technologies for the global transportation, industrial and consumer markets. The Company’s products are used in a range of applications and are sold into markets, such as those for engine oils, specialty driveline lubricants and metalworking fluids, as well as markets, such as personal care and over-the-counter pharmaceutical products, performance coatings and inks and compressor lubricants.

Sure sounds like a winner to me. Certainly good enough to be at all time highs right? I'll let you decide based on these charts. But to me, I'm not buying it until we see some type of consolidation in the stock price.

Daily Chart:

Going straight to the moon. Chart looks like a screaming buy right?... Wrong, trendline broken. GET ME OUT!

Weekly Chart:

Testing what I like to call Horizontal Resistance marked by recent all time highs, made in what month/year? You guessed it October 2007. Check out that 75 weekly RSI, where's Cramer when you need him? BUY BUY BUY!

Monthly Chart:

Testing the top of the channel dating back to the infant stages of the stocks life.

Disclaimer: Stock can always continue higher, but based on charts it looks like its due a pullback of some degree. Please do your own analysis and do not base your decisions solely on what I just posted.

Market Update: The Beginning of the Month: Good or Bad?

2009-10-01T23:51:00.000-07:00

I thought today was important enough to give a quick update on the market.

Market Summary
The past couple of days we have seen a volatile continuation of the topping process of price level 1080 on the SPX. If this is a major top is yet to be seen, but it appears we have officially made a set of lower highs and lower lows which is a good start to the beginning of a downtrend. With a break of the 1039.47 price level, we have officially ruled out the alternative bullish scenario to see a near term upside break of the 1080 highs. A further pullback of some degree is in order.

Monday was a much expected rally on very low volume. The rally spilled into Tuesday reaching within pennies of the 61.8% retracement. It made it appear as if the dip-buyers had stepped in for the third time and were beginning to push this market to new highs. However like I had imagined, one of these dip-buying programs was going to fail and they were going to be punished. Sure enough they got smacked in the face Thursday with the Dow's first 200+ point drop in a long time.

Market Breadth

The past two days have seen significantly strong NYSE Down Volume confirming the downward price action. In addition we had a ~19:1 down day (Ratio of Down Volume to Up Volume). This certainly is further confirmation of the move lower.

As seen in the chart posted at the top, I'm still working on the Market Breadth indicator. One interesting development that I continue to track is the divergence that is created whenever we have doji type consolidation days. It seems the volume starts picking up in the direction of the future trend a few days early creating divergence in the indicator. This is definitely something I will continue to watch to see if I can point out when to expect a bounce.

Log vs Normal

The log scale looks like a clean break of the trend that has held this market up for this entire rally. However if you draw in normal scale, you see a different picture:

I pointed this out a few weeks ago, the discrepancies between the two charts, and I am still unsure which one to use. The log-scale has the argument that it has several significant touches of the trendline, while the normal scale is yet to be tested a third time. However if you notice the red trendline matches up perfectly with the normal scale, so I believe it is safe to say we shall see some type of support at this level. Remember 1014-1018 was once pretty significant resistance so it would make perfect sense to look there as the next possible level for a bounce.

The Beginning of the Month: Good or Bad?

In conclusion to this post I'd like to answer the title of the post. Is today's downside move suspect, or is it really the start to a bigger pullback? Obviously that is the million dollar question, however if we remember the last big drop in the market occurred on September 1st, 2009, exactly 1 month earlier from today. This day experienced nearly a 200 point drop in the Dow Jones and significant downside volume with a DVOL ratio of 15:1. Obviously you know what happened after this date.

In addition, its very rare to find downside monthly candlesticks that don't have at least a couple ticks to form a tail on the upside. This would of course be created for this month if we fail to make a new high above today's open. We shall see if it occurs again, but let me pull a trick out the bullish analyst's bag (by only analyzing the past few years of data), and let me show you the last time this scenario HAS happened.

NHYT -- buy alert

2009-09-30T23:23:00.000-07:00

NHYT.OB is an automotive fuel company stressing green technologies and I am expecting big things from them on the heels of a couple of their recent press releases. Research Report has given Neohydro Technologies Co. a $1.50 price target within the next 18 months and I am actually anticipating an exciting short term run up over the next 2 weeks as well. Currently at .27 cent per share, I feel this bad boy could be seeing the .60's by early next week, don't miss the boat on this one! Good luck!

Back Ratio Spreads Explained

2009-09-30T11:17:00.000-07:00

The Back Ratio provides excellent risk management and is good to trade when you have a directional bias on the stock but want to protect yourself in case the stock does not behave as you had expected. This makes the Back Ratio a good trade before earnings' announcements or other significant news events.

Basic transaction:
If you are bullish on the stock.
Sell lower strike call
Buy higher strike call
Where you buy more calls than you sell. The usual ratios (thus the name back ratio spread) are 2:1, 3:2, 5:3. For instance buy 2 calls and sell 1.
Both for same expiration, preferably 2-3 months out.
This trade is shown below in the risk profile graph.

OR
If you are bearish on the stock.
Sell higher strike put
Buy lower strike put
Where you buy more puts than you sell. The usual ratios (thus the name back ratio spread) are 2:1, 3:2, 5:3. For instance buy 2 puts and sell 1.
Both for same expiration, preferably 2-3 months out.
The risk profile will the similar but opposite to the risk profile below.

Risk Profile:

Current price for BAC is 16.90.
Sell 1x 17.5 calls for .95/contract
Buy 2x 19 calls for .47/contract
Total net CREDIT .01/2:1 ratio.

Strategy:
The first thing to realize for this trade is that we have a net credit. This means you GET .01/spread. This does not necessarily happen every time. It is just as easy to find net debit spreads or net credit spreads where the credit is pretty significant- it really all just depends on the implied volatility of the options. Keep in mind that if you have a huge net credit spread, it means that the demand of your short option is much bigger than your long option. This could mean that you may have missed something in your analysis and need to figure out why the demand of the short option is so high.

Secondly, a back ratio is something you never keep till expiry (unless you have a net credit and the stock goes way south of where you had expected it to go). So, in my explanation below, I will assume that we will trade away this back ratio after 3 weeks.

You bias on a call back ratio is bullish and a put back ratio is bearish. The basic reasoning for trading a back ratio is that it reduces your cash outlay, and as seen above, can in fact create a credit trade. Back ratio also significantly reduces your risk if your hypothesis is wrong and the stock moves the other way. All these are explained below in more detail.

But first, I will illustrate what would happen if you simply bought a call contract. If you bought a Nov call contract for strike 19, your cash outlay would be $.47/contract. Your max loss, after 3 weeks, of $.47/contract is highly unlikely. A more likely scenario is a support level your identify. Assume this support level is $15, at which point your loss is .33/contract, or about 70%.

Your max profit is infinite if BAC rises forever. Your infinite profit scenario is highly unlikely. What is more likely is that you will identify some resistance/target level that you expect the BAC to reach. Let's say this target is $20. At $20, your profit (in 3 weeks) is 1.26/contract. That is a ROI of 268% (Woah!) when the stock moved 18%. That is pretty awesome.

How does the Back Ratio compare to simply a long option. First of all, you have a net credit so you cannot use a ROI to figure out your return. Instead, I use return on margin requirement, which is $1.46/spread. Max loss, after 3 weeks, in this case is around .09/spread, which you get at $16.70. At ALL other price levels, your loss is less than .09/spread, or about 6%.

Your max profit is infinite, but highly unlikely. Assuming the resistance level of $20, your profit at $20 is .66/spread. That is a return on margin req. of ~45%.

Reduced Cash Investment
As is clear, the cash investment for a Back Ratio is significantly lower than for a simple long option. On the other hand, the margin requirement is much higher. However, if you have a broker that will let you reduce margin requirements (because you will never reach that max loss level), you might be able to leverage that and use those funds for other investments.

Reduced Risk
The max loss for a long option, based on the scenarios described above, is around 33%. Compare that to a mere 6% max loss scenario for the Back Ratio. Also, remember that the 6% loss is only possible at a single price level, which is unlikely. What is more likely is that with the Back Ratio your max loss exposure is much lower than 6%.

Potential Return on max loss: 1.26/.33= 318%
Potential Return on max loss: .66/.09 = 733%

Volatility Play
Another important aspect of the Back Ratio is the importance of implied volatility in this strategy. The biggest take-away is that if the implied volatility of the options rises, your position, payoffs, and risk exposure improve significantly. If it falls, you are much worse off.

Entire books have been written on this subject so I will not go into more detail on this subject in this post.

In conclusion, the Back Ratio is an excellent choice when trading an underlying which could move either way. You clearly have a directional bias and anticipate the stock to move one way, but you are not exposed if the stock does not behave as you had anticipated.

Short Play on Neutral Tandem

2009-09-29T11:01:00.000-07:00

I believe this may be my first short idea on this blog and I believe it is a good one. We are on top of a possible A subwave of a major wave 4. The stoch and moving averages have both made a bearish reversal very recently. The time studies also show that the correction should be over between 10-6 to 10-7. We might not even see a long ABC correction in which case the correction could be over as soon as 9-30 to 10-1.

Also look at the extremely light volume on the modest up move from the lo of 21.19 - further confirming the hypothesis that this move up is simply a correction. Finally, The major trend is bearish on the weekly chart. The weekly chart also shows a target zone of about $19-20.

As far as the trade set up, I did not find anything good on the options side - the volume is too light. I would just short the stock if it breaks below 22.68 with a stop loss at 23.20.

Market Breadth Studies for TOS

2009-09-28T22:15:00.000-07:00

Here are two custom studies I've coded for TOS platform which deal specifically with NYSE Up/Down Volume.

The first one is NYSEBreadth and gives you a histogram which totals the Up Volume + Down Volume to give you total volume for the day. The blue line plotted over the histogram is the ratio to show how strong the volume was. If there is more up volume then down volume then the ratio will be (Up Volume/Down Volume). If there is more down volume then up volume then the ratio will be (Down Volume/Up Volume). Another words, don't be using this as some type of oscillator or divergence indicator. This inidicator works on multiple timeframe, and I prefer looking at this volume rather than the SPY volume, because you can have days that are up in price but really take a behind the scenes look to see if there was any distribution going on.

NYSEBreadth:

declare lower;

def tVolume = close("$UVOL+$DVOL")/1000000;

def uVolume = close("$UVOL");
def dVolume = close("$DVOL");

plot Breadth = tvolume;

Breadth.SetPaintingStrategy(PaintingStrategy.HISTOGRAM);
Breadth.DefineColor("Positive", Color.UPTICK);
Breadth.DefineColor("Negative", Color.DOWNTICK);
Breadth.AssignValueColor(if uVolume > dVolume then Breadth.color("Positive") else Breadth.color("Negative"));

plot volume;

volume = if(uVolume > dVolume, uVolume / dVolume, dVolume / uVolume);

Volume.SetStyle(curve.FIRM);
Volume.SetLineWeight(2);
Volume.SetDefaultColor(GetColor(3));

The second study that I developed is the ratio of Up Volume to Total Volume but I've noticed it plots much neater if you smooth it out with a moving average. The default is 5. This is used to notice divergences and potential changes in trend before they happen.

NYSEBreadthRatio:

declare lower;

input length = 5;

def uVolume = close("$UVOL");
def dVolume = close("$DVOL");

def VolumeRatio = (uVolume/(uVolume+dVolume));

plot Avg = expaverage(Volumeratio, length);

Avg.SetStyle(curve.FIRM);
Avg.SetLineWeight(2);
Avg.SetDefaultColor(GetColor(7));

A note about getting filled quicker on TOS

2009-09-28T11:56:00.001-07:00

I have noticed that when trading options, when you put in a limit order at the current mark price, it can take a while for TOS to fill the order. But, for some reason, if you put the limit order in for 1-2 cents above the mark, it fills almost immediately. It might be worth it to you to do that because sometimes TOS can take a couple of hours to fill an order.

For example, I was trying to trade a spread at .93 limit order. TOS showed mark price as .93. I waited about 20 minutes before changing the order to limit .94 and was filled almost immediately. This is not the first time either - I have noticed this before as well.

On another note, I updated the diagonal spread tutorial with more details.

Futures Update & TOS Platform

2009-09-27T18:02:00.000-07:00

Futures are currently slightly down, testing support. Here is a screenshot highlighting the support/resistance levels to watch on the /ES. Please note that the /ES is currently trading a few points lower then the S&P so these levels are a bit higher on the SPX.

Also I just did a fresh reinstall on my laptop since it was running a bit sluggish. Actually took me quite a bit of time to make my blog post earlier because it kept freezing. After installing the TOS platform again I decided to test out the layout conversions they were working on. They did a really nice job with the grey/metal layout. I much prefer it to the default black.

Weekly Update for Sept 27

2009-09-27T13:08:00.000-07:00

It seems I have the most time on Sundays to do a post on the blog. So expect a weekly update, and if I have time I will come up posts of interesting items I find during the week. I have another post scheduled highlighting good individual stock opportunities, however I don't see myself posting that today because I still need to research them further.

Market Summary

To start off we had a very interesting week. The market played out exactly how I thought it would. For a bearish topping candle on the weekly timeframe we needed to expect new highs during the beginning/middle of the week and a strong close near the lows. We did exactly that, so the highs on Tuesday and Wednesday were no surprise to me.

There are several sources now saying that this rally from 666 has topped. According to Elliott Wave if we break below 1039.47, it is almost a guarantee the safest strategy will be to sell into strength because we are going much lower. However the bullish alternative says we can still make one last push to around 1097-1122 [unless we break 1039.47]. Therefore I expect some confusion early in the week with a clarification on Tuesday/Wednesday which way the market has decided to go. I'd say a break above 1058-1060 may lead towards the bullish alternative and any break below 1039.47 is very bearish.

1938 vs 2009
Instead of updating my comparison chart I figured I would show this chart which compares 1938 vs 2009 in much more detail with daily candlesticks. [Interestingly, Yahoo is actually good for something because they are the only source that I can find that has candlesticks for 1938, all other sources just show dots on the data feed.] I've mapped out the rally which ended the 1938 rally and it definitely has a very good correlation to our current wave pattern. The letters on the chart are only used as reference points.

My 1066 Target & Distribution

Like I had stated in my earlier blog post, 1066 looked like an important level to me and I assumed the market needed to reach this before any major turn lower. Although it eventually pushed higher to top at 1080, the market seems to be obeying this 1066 level on the weekly time frame. This gives an even stronger signal to me then the daily timeframe.

Also in my chart is an updated version of my UVOL/DVOL indicator. As you can notice by the color of the last 3 bars, the last 3 weeks have seen sell volume greater than buy volume [also at an increasing rate] even though prices have headed higher. This is of course a bearish divergence. The last time we had 3 weeks of distribution was back in July however if you notice the the volume is much heavier this time around. I think the last major selloff was more confusion and people shorting rather then distribution and selling.

The TRENDLINE
As you know we have been building up a bearish ascending wedge during this entire rally. Basically we have been consolidating up for a new move lower. If I were to believe in this rally I would have rather seen some nice pullbacks along the way. Also I've seen reports say we've done this before (go up with no consolidation) and I looked back to the 1970s rallies where this has happened...and what followed was just another breakdown to new lows. Anyway there has been a trendline holding up this entire rally. Here is just one possible way you can draw it which connects all the lows. If this is correct we better see some quick upside or it may be a signal we are breaking down.

The Dollar and Commodities
Since I went over these last week I might as well give an update since they are very important and will give confirmation of what will happen on the equity side.

The Dollar
The dollar finally is gaining some strength. There may be one last push downwards, but I tend to doubt it. If the market has topped, that means the dollar has bottomed. You will also see the effect of this "bottom" on commodities. If the commodities have built such bearish patterns I cannot see them regaining strength. It is for these reasons I tend to believe the dollar has bottomed.

Gold
Gold is back below 1000. I don't believe in the rally whatsoever. If the dollar is going to bottom which I believe it will, then gold is going to go right back down. No breakout here..... yet.

Silver
Silver continues to look bearish. Would have been a great short last week when I highlighted it breaking down. Also something interesting to note is that silver has lagged gold the past couple years. If gold is to make all time new highs why isn't silver?

Crude
Crude chart looks the worst of all the commodities. Head and shoulders breakdown. Just think if the dollar is going to rally here where does that leave Crude? $50, $30, $20, $10?

Natural Gas
I missed it. I had made a post about a month ago highlighting the trendline in natural gas. I guess I never noticed it because of the lackluster correlation between UNG and natural gas. Natural gas has jumped well over 100% the past couple weeks, but UNG hasn't moved. Oh well.

Accenture Triple Calendar

2009-09-24T15:13:00.001-07:00

There are two key factors for Accenture and this trade:

Earnings on 10/2 will probably move the stock significantly. If you look at the previous two earnings reports, the stock has jumped up or down around 10%. In anticipation of this, implied volatility for the stock is on the move. There has been a lot of call activity recently, signaling that speculators are anticipating the earnings to be good.

On the charts, the $33 (orange oval) area is showing a lot of support. We also have a teacup shape in the green rectangle and that has set up a lot of resistance around the $37 level. I anticipate the stock to move between $40 (the year long high) and $33, no matter what the earnings report is.

The Trade:
Although the trade hasn't been executed, I anticipate it will get filled tomorrow morning fairly close to the prices below. The details of what I will buy/sell are listed below in the risk profile picture.

As you can see, if by Oct 16th, the price is anywhere between $29-42, I am in the money and will walk away with a profit. My max profit is $261 on an intial outlay of $285 (which is alos my max loss).

Also, based on the historical standard deviations, my odds of profit are somewhere in the vicinity of 89%.

A trade that has potential of 92% profit in a mere 2 weeks and an 89% probability of profit - I will take that everyday. I will update at what prices did I get filled at and what my final risk profile looks like.

Watch your greeks

2009-09-24T07:59:00.000-07:00

I learned an important lesson today: Always watch your greeks.

What are greeks?
An options' price is derived from various greek letters that stand for various different things:

Delta: option price's sensitivity to movement in the underlying stock's price. If delta is positive, the option price goes up as stock price goes up.

Gamma: Options price's sensitivity to movement in the delta (or how fast the delta moves with the stock price). If gamma is positive, delta increases as price goes up, and vice versa.

Theta: Effect of time on the option. If theta is positive, time is in your favor and vice versa.

Vega: The effect of implied volatility. The higher the vega, the more you want volatility to be. The higher the volatility, the higher the option price.

Rho: Effect of the risk free rate

Many strategies out there focus on keeping delta near 0, or theta always positive, or vega high/low in times of rising/falling volatility. I have been focusing mainly on theta and volatility, but I learned today that you should be mindful of all the greeks.

As the SPY fell today, many of my holdings fell along with the SPY. Although my theta and my vega are still positive and the increase in the VIX (overall implied volatility) helped my position, I failed to look at my deltas.

Unfortunately, I had deltas as high as 300 (for every one dollar move up in the underlying, my position would go up $300). Unfortunately, the inverse works as well, and for every dollar move down, I lose $300. And that is what happened. I could have easily hedged my self by purchasing securities with negative deltas or liquidating some securities with very high deltas.

I have taken steps to reduce my deltas and in the future i vow to be more mindful of such things.

Resistance Zone - Fibonnaci Confluence

2009-09-22T23:01:00.000-07:00

Here are all the relevant extensions and retracements that I can think of. Notice the Fibonnaci confluence around 1097 and 1121. Those are my new targets if we get above 1071 - which has two resistance levels. I don't see this [1071] being the top though since I've stated we have room to run. Also I apologize, but there appears to be something wrong in stockcharts and Prophet. We didn't fill the gap in the SPY yet. Not sure what is up with that.

Diagonal Spreads Explained

2009-09-22T09:58:00.000-07:00

A Diagonal spread is an excellent choice when you have a strong directional bias and have identified a strong resistance/support level. It is also an excellent strategy for creating monthly dividend-like income. This strategy is very similar but much better than a covered call. So, if you like covered calls, you should try this instead.

Basic transaction:
If you are bullish on the stock.
Buy lower strike In the money (ITM) call with long expiration
Sell higher strike out of money (OTM) call with short expiration
This trade is shown below in the risk profile graph.

OR
If you are bearish on the stock.
Buy higher strike ITM put with long expiration
Sell lower strke OTM put with long expiration
The risk profile will the similar but opposite to the risk profile below.

Risk Profile:

Dec Call costs 2.9/contract
Oct Call costs .3/contract

Strategy:
You bias on a call diagonal is bullish and a put diagonal is bearish. The basic reasoning for trading a diagonal is that it reduces your cash outlay, thus increasing your ROI. Also, you can use a diagonal campaign to give yourself dividends on a month-to-month basis. Finally, Diagonals reduce your risk in case your hypothesis is wrong. All these are explained below in more detail.

But first, I will illustrate what would happen if you simply bought a call contract. If you bought a Dec call contract for strike 41, your cash outlay would be $2.9/contract. If in case the stock goes south of 41, your max loss is thus $2.9. Your max profit is infinite if the QQQQ's rise forever. Your infinite profit scenario is highly unlikely. What is more likely is that you will identify some resistance/target level that you expect the QQQQ to reach. Let's say this target is $44. At $44, your profit is .92/contract. That is a ROI of 31% when the stock moved a mere 4%. That is a pretty sweet deal. But, with a diagonal, you can do better.

Increasing ROI:
Again, assuming the Dec call costs 2.9/contract, let us also assume that the Oct call strike 44 costs .30/contract (these are actual prices I got while making this post). So you buy the Dec contract and sell the Oct contract, reducing your cash outlay by 10% right away. Thus, any profit you make will have a higher ROI. Additionally, for any stock price below the short short contract, you will have a higher profit than simply with a long call.

For instance, let us say that the stock moved up to $44. Your profit is 1.07/contract, increasing your ROI to 41%.

Dividend Play:
Assume you carried out the trade explained above and by Oct expiry the stock is between $41 and $44 and your bullish outlook still holds. Well, you can go ahead and sell Nov contracts (strike will depend on your outlook for the QQQQs at that point) and rake in another 10% or so. If you had bought Feb contracts instead of Dec, you could do this every month and make around 40% just from selling the OTM contracts.

Reducing Risk:
Going back to the original Oct/Dec diagonal, because your initial cash outlay is lower, in case the QQQQ's fall dramatically, your max loss is much lower compared to if you had simply bought a long contract. This is best illustrated by the fact that the QQQQ's have to hit $31 to achieve a max loss scenario of $2.6/contract for the diagonal trade. On the other hand, anything below $41 gets you max loss of 2.9/contract for the long call. Thus, not only is your max loss lower but also harder to get to.
Of course, you would sell this position off before reaching max loss, but the above point holds true for all QQQQ's prices.

The one drawback of the diagonal spread is that if the stock moves above $44, your profit is capped and in fact you start losing some money after $44. For example, if the stock moves to $54, you will make only $.42/contract. If the strikes for the trade are close enough (for example 41-42 strike diagonal), you could even loose money as the stock keeps going higher. So be mindful of this when trading diagonals.

Celgene: Long Call Diagonal

2009-09-21T20:39:00.000-07:00

Looking at the weekly chart, I believe an ABC correction has ended and we are starting a new bull trend. I am basing this hypothesis on the fact that three very key fibonacci retracements and extensions on the weekly chart point 50.70-51.70 price level, indicating that a major correct to the trend should be in that area. 2 weeks ago we saw the stock hit that price and has bounced since then.

Fibonacci time retracements also indicate the correction is over. Finally, the Stoch made a bullish reversal right around the bottom of wave C. Thus, the weekly chart looks very bullish, indicating this is a strong buy. One key level to watch is the 55.80 price level since this has proved to be a major resistance/support level on the 3 year weekly chart (not shown). If we can break above the 55.80 resistance and maintain that as support, the bull trend will be confirmed. The hourly chart (below) however shows that 55.80 resistance is still holding strong.

Daily chart also showing strong bullish trends. The price gap is important because it has created a void which, if the price falls, could be filled in a relatively short time span. Additionally, there has been a bearish reversal on the Stoch which is of some concern.

The two key things to note on the hourly chart are:
1. How cleanly we bounced off the 55.80 level today. The price is going up, up, up and then all of a sudden hits the resistance and cannot hold on at all.
2. The significant advance today because of a couple of upgrades. I feel the stock may be overbought right now and could see some fall back.

Finally, found this chart on Shaeffer's Investment Research which shows how the P/C ratio fell significantly on 9/17. This is of course very bullish. The chart shows the stock price's inverse sensitivity to the P/C ratio.

In summary, I am bullish on Celgene contingent on the price breaking the 55.80 resistance and confirming the breakout. After doing some volatility analysis, Celgene is a good candidate for a Long diagonal.

Buy Jan10 55 Call
Sell Oct09 60 Call

I will post the details of the trade if I decide to go long.

Edit: I just noticed that the P/C ratio graph is different from the one I saw. It shows how the P/C shot up the next day again as the price shot up. Subsequently, the price has dropped. Look for a follow up on how I managed this trade.

Shorting Penny Stocks

2009-09-20T23:33:00.000-07:00

This is something that I found on the hotstockmarket forums, posted by mjoke -- A very good write up on shorting penny stocks and how they work and what not.

I AM Posting this in a effrot to clarify and set people straight.
Some are going around saying certain stocks (pennies) are being shorted.
This is not applicable let alone a good idea.. AT ALL. 9 time out of 10 its a pump and dump and they want you to hold the bag. Yes a few are shorted but as you can see by the MARGIN requirements it inst not a valid nor wise choice.. more so due to the uncertainty of pennies in general and you can lose everything.

You want to short,??
GO TO the big boards where TA and other indicators actually give you security and you can see what is REALLY going on. (within reason)

Regarding PENNIES and SHORTING :::

Many OTC companies are either brand new unprofitable companies or larger bankrupt companies that have fallen from centralized exchanges. As a result, there is a great opportunity for traders to short-sell these stocks – or bet on them declining in price – and make a hefty profit. In fact, some notable traders like Timothy Sykes have made a fortune making such bets. However, there are many large risks to making these short trades must consider.

Getting started shorting penny stock is very simple – just ask your broker if they support this type of activity. Often times, discount brokers will allow clients to short-sell certain popular penny stocks, while only specialized trading firms will allow shorting of almost all penny stocks. However, these specialized firms often have higher commissions and/or a minimum number of trades per month in order to quality. Finally, investors should also make sure they have access to real-time level II screens.

Trading Strategies

Short sellers are simply looking for stocks that are overvalued and betting on their decline. Since the losses are unlimited and profits are limited, it is very important for short sellers to carefully research their prospects and be sure that things are bad. Moreover, it is important to be wary of penny stock promoters that may be trading against short positions and bidding up the prices of the stocks. However, there are many ways to profitably short penny stocks.

Here are a few tips to get started: If you want and have the capital..

•Only short penny stocks that are $0.50 or higher (due to margin requirements and the likelihood of manipulation).
•Carefully watch past price ranges to determine your expected margin requirements.
•Watch for stocks that go up on fluff news or press and wait for the day when it tops out.
•Watch level II quote screens to identify where market makers are placing the floors.
Risks of Shorting Penny Stocks

Margin Requirements

Brokers require investors to put up collateral to guarantee against potential losses in the form of margin requirements. Often times, brokers will require OTC investors to have $2.50 of margin per share to short a stock under $2.50, which can make shorting penny stocks very costly. For example, if an investor shorted 2,000 shares of a stock at $0.50, you have to have $5,000 in your account. All along, the maximum profit for this position would only be $1,000, if the stock went to zero.

Execution Risk

Penny stock short sellers must also worry about execution risk with their trades. Short selling involves borrowing shares from someone else and selling their shares, so even if an investor finds a great short selling candidate, they may be out of luck if the broker has no shares to lend. Similarly, the pricing for these short trades may not be favorable due to the often-large disparity between the bid and ask price. As a result, investors must watch these prices carefully before initiating a short position.

Market Manipulation

Market manipulation has always been a problem in the world of penny stocks, but this risk is especially large when shorting penny stocks, since the losses when short selling are unlimited. The best targets for short-selling are often those subject to manipulation or promotion by unscrupulous web sites of funds. However, these manipulators have a distinct advantage over the short seller – they have capital, price and liquidity on their side – which means investors must be very careful.

Shorting Big Baords, Blue Chips i condone if you have the capital.

Shorting Pennies, Give someone your money instead...