Futures Down 1%

Futures are showing weakness into the open, possible short term reversal set for the beginning of the weak. As shown below the /ES never made a new closing high, and the /NQ is right at resistance. Also the dollar seems to be gaining some strength and setting up for a near term reversal.

The question is whether we are going to see another buy - the - dip scenerio. I think everyone is starting to feel like the top is extremely close and that October is going to be a bad month. We are going to need some bearish formations on the weekly and monthly chart set up going into next month. Last week's weekly candle was not very bearish at all and actually looked pretty bullish to me. The weekly chart shows we should make some type of retest/new high this week before any type of major drop. So we need to see weakness at the end of the week(s) and month of September for any hint of bearish action soon to come.


Here are two more charts that I'm looking at. As most of you are all aware of there are two ways to plot the charts, in normal or log (%) scale. Plotting trendlines in the two different scales gives two different results. I've seen everyone now charting the ascending wedge formation in the SPX and when I went to draw the trendline for myself I came up with a pretty interesting example of why you should use both types of charts. Below is a comparison of the Log to Normal scale:

Log:

Normal:

Interestingly when drawn to normal scale, the resistance goes all the way back to November support. When drawn on the log scale it cuts through the prices and wouldn't normally have been considered a real trendline. There is added significance to this trendline now because there has been so many touches/tests in the past couple of months. 

Below is a chart of my prediction to come over the next couple of weeks. I do believe we will see one last push higher because every chart that I've seen in the past reaches some Fibonacci target. Therefore I cannot see us topping out right here in the middle of nowhere. 1066 is the retracement from the August top of 2008. Seems like a good place to start. 

Lastly I've gone ahead and updated my 1937 chart. My chart made its way onto CNBC (note the title and CNBC's terrible mockup). This was actually an old version that Nenner got a hold of when I was comparing the Q's vs the 1937 INDU. I've been in communication with Nenner since I found out he was watching my chart. Apparently it was sent to him by a bank in Europe. I'm not sure if this being reported on CNBC is a good or bad thing. Its neat that it got some recognition, however now that CNBC has showed it I'm sure Goldman Suchs will change a few algorithms in their HFT to avoid making "history repeat itself" :

Click Here to Watch

Here is the chart showing we are very close to the top:

El Paso Corp.: Back Ratio Call spread after ABC low

Let me start by explaining the weekly chart. Although I have not labeled it, there was a 5-wave gain from March to mid June. This was immediately followed by an A B and C (?) wave. The orange circle near the A wave shows how the stock bounced very neatly off the 50% fib retracement. Wave B tested the high around 10.90 and bounced back down for wave C. Wave C is bouncing neatly off fib levels (retracement of the trend and extension of the AB wave) and the red trendline. Thus, I believe the correction may be over and the bull trend will probably continue to new highs.

I have also done some time studies. These studies (fibonacci extensions of the AB wave, retracements of the trend and the low-low cycles) say that the correction low should be in the range of the blue rectangle. As you can see, the wave C low falls very neatly smack in the middle of the blue rectangle.

Finally, the Stoch is making a bullish reversal in the oversold zone which is avery strong bullish indicator.

To further confirm my analysis, I took a look at the daily chart. The daily is a zoom in of Wave C from the weekly chart. Although the fibonacci price studies are not as neat on the daily chart, the time study (not surprisingly) shows that low should have been made on 9/3 (which it did). The Stoch is still in a bullish trend although it is in overbought zone which is of some concern.

Additionally, the bear channel and the trendline I have drawn in red shows we are just hitting the high and could potentially face resistance at the 9.90 level.

Overall this looks like a high probability set up for a bullish trade. I have been looking at Back Ratio call spreads and the following looks like an excellent trade:
Buy 30 Oct 09 $9 Calls
Sell 15 Oct 09 $8 Calls

Although the prices will probably change a little as the stock moves (I plan to enter at 9.91), right now this trade will cost $579. If the stock should rise to the Wave B highs, I should make around $1000 (depending on time). At expiry my max loss is $2561, but I am setting a max loss of around $400 with a stop loss exit at 9.63.

Update:
Price broke above 9.91 today and I went long the BRC spread. Unfortunately I got kind of screwed on the bid ask and got a terrible price. My breakeven on the spread is 10.10 today and each day it falls as time decay hurts. This has made me move my stop up to 9.75 and also reduced my profit potential at 10.70 to a mere $600. Still, the stock moved to as high as 10.02 today and my hypothesis seems to be coming true.

Put/Call Ratios out of whack

When I learned about P/C ratios I read ".80 - 1.00 is usually normal. A ratio of .70 is seen as very bullish and 1.10 is usually seen as very bearish sentiment by the 'smart money'".

I randomly decided to check the P/C ratio for various indices, futures, and my holdings today and was surprised. Below is a summary:

QQQQ - 1.384
SPY - 1.424
/SI (Silver) - 1.751
/NG (Nat Gas) - 1.031
/CL (Light Sweet Crude Oil) - 1.758
/GC (Gold) - .458

The smart money seems to think we are headed down and big time. Yet the rally continues with no end in site. All the momentum indicators are pointing up; Breadth seems to be in good shape; and advancers far outweigh the decliners. Who is buying the stocks when it seems like everyone is buying puts?!

Hell if I know. All I know is that I am holding off on a shopping spree for puts and short positions while setting very tight stops on my long positions. I would rather miss out on a few percentage points by arriving late on the bear bandwagon than get wiped out while the market continues rallying. I advise you do the same.

Except gold; buy tons of gold...

Penny Stock "Sure Thing" Of the Month: GVBP

I know what you're thinking... There's no such thing as "sure thing", and while I'd normally tend to agree with you, this may be the closest thing we have seen thus far. GVBP, Genova Biotheraputics, has been ON FIRE over this past week, and I don't see a roof in sight!! This company is similar to the likes of CTIC, HTDS and other biotheraputic/pharmacutic companies that have already seen gains of nearly 1000%... And with President Obama's health care push, and the CONSTANT PR on the part of GVBP this is a sure winner!!! Let's take a look at this week alone...

As you can see this thing has already made quite the run up (more than doubling in price)... Not to mention a nice .03 run up at today's close, leaving room for an exciting gap tommorow... ON THIS NEWS AT CLOSE... As things thing continues to acquire patents, and non-chalantly throwing around figures in the billions this is one stock that I would definitely keep an eye on... Good Luck!

Gen Dynamics Backratio Call

I am going to split the explanation for this trade in two sections: Financial and Technical.

Technical Analysis

I found this trade using the pattern finder on TOS and initiated my analysis on a technical level. So, logically, this comes first.



Here is a legend of all the drawings on the chart and I apologize for the messy drawings. Please read on to see what the drawings mean.
WEEKLY LEGEND:
Red Lines: E-Waves
Blue Fibs: Fibonacci extensions of the 0-1 Wave.
Green and Black Lines: Important Fib levels from the daily chart (explained later)
Grey box: The Daily chart's time frame

DAILY LEGEND:
Red Lines: E-Waves
Green Fibs: Extension of the 2-3 Wave
Blue Fibs: Extension of the 0-1 Wave
Purple Fibs: Extension of the 0-3 Wave

Now that we know what the Fib lines are, I can begin my explanation. On the weekly, we completed waves 1 and 2 and are in the middle of wave 3. This means that theoretically we have some significant upside potential and can also expect a corrective wave 4 before the stock continues upwards. Also of note is the fact that the Stoch indicator is showing some major overbought pressure. However, the fast line is still above the slow and a momentum reversal has not occurred, indicating that wave 3 is not yet over.

The question then is when will wave 3 be over? Looking at simply the fibs on the weekly (blue lines) we have 3 important levels to look at. The 100% extension coincides very closely with the channel line and is probably going to be an important level to watch. The yellow box is also extremely important and the reason for that can be found in the daily charts.

On the daily, firstly, there is a bullish momentum reversal (albeit very close to the overbought level) that could mean a healthy upward movement.

Additionally, the daily chart has formed an E-wave as well and is in the middle of the 5th wave. I believe that the end of this 5th wave on the daily will coincide with the end of wave 3 on the weekly. I have drawn some important and common fibonacci extensions (explained in the legend). The areas where these fibs are clustered together are going to be important resistance levels. Thus, the grey boxes on the daily chart are going to be important resistance levels. The green and black line and the yellow box on the weekly is drawn based on these fibonaccis. That is what makes the $63-66 level very important.

To top it off, this same level is very close to the top of an inverse head and shoulder on the weekly.

So as you can see, all the technicals have lined up and indicate that the stock should move higher and after struggling in the 63-66 level. Wave 5 is still too unpredictable on the weekly and I would be hesitant to make any guesses about that wave.

Financial
Financial analysis could play a key role in this stock because earnings are due on Oct 28th. Admittedly my financial analysis on this is quite shotty. I merely glanced at the ratios and determined they looked good. However, I did research the news for some time and found good news all around.

The company is expanding operations overseas; just won a $31 million contract from US gov't; positive M&A activity is going to allow the company to expand outside of the defense industry; and so on. So based on all this I at least expect GD to give earnings estimates that outperform analyst expectations.

The Trade
I realize I have already written a book, so I am going to keep this section short.
Bought a Back Ratio Call
+5 60 Nov Call
-3 55 Nov Call

In short, I am going to hold on to this until the 66 level (where I can probably make around $200) then sell off parts of the trade. I am hesitant to put a stop on this because if the stock falls to $55, I will be $250 in the money. Theta is really my only enemy. Volatility is high and I hope it remains high. Seeing has how the stock has nearly doubled since March, I expect it to continue going up rapidly or crash rapidly.

Weekly Candle Pattern 08/08 vs 08/09

I'm a fan of looking back to see if history tends to repeat itself by finding patterns that have happened before and applying them to today. Here is one that I found last week that I thought was interesting enough to share with you. When I found it I thought it was done after we had our 200 point drop but it seems the market closed on a positive note and was able to continue the formation. If there is any truth to this pattern we should not close see any prices above 1028. Interestingly enough this pattern is also the top right before the October free fall made last 08. Could there perhaps be a repeat?

The QQQQ

I have been looking at some charts and wanted to share my analysis on the QQQQ (I have vested interest in the QQQQ).

First let us take a look at the QQQQ weekly.


Firstly, the Stoch on this chart has been a fairly strong indicator of when to buy and sell. As you can see, the Stoch called the March low within one bar. Also called the May and June corrections (gray rectangles). We are seeing a similar pattern once again today (mustard rectangle). However, the correction has been bouncing off the trend line I have drawn. Coincidentally, if the QQQQ reaches the trendline this time, it is also the 61.8% fib level. So I expect this bounce to happen in the green area.

Next the daily presents a similar picture.

The key difference is that the stoch, which once again, on these settings, has been a good indicator for QQQQ, is showing a strong bearish momentum. However, like I said, we are still not breaching the trendline nor the August lows. At the moment seems like the price is bouncing off the fib level. $39.04 is going to be a very important level based on the weekly and daily chart. Also take a look at the solid blue line which is going to serve as the next support after 39.04. This is going to be an even more important level because if this is broken, there is no support until around the $37 level which could be very interesting. And looking at the intraday chart, I am concerned that we could even reach those levels:



As you can see a bear trend has been established on the intraday chart as the price has taken out support after support. As I said, right now we are bouncing off the fib but even that was taken out at one point.

So from a trading stand point, what am I doing? I already have puts for the QQQQs and have been selling OTM calls. I am hedged, however, with long calls at 35 strikes. I also have orders to buy more puts if QQQQ goes below 39. If this happens, I will play this with a very tight stop because the price could fake down and then bounce right back. If the price does not do that, my target is $38.46 for the QQQQ.