Is the top in?

Elliot Wave seems to think that the top has come in at 1040 on the S&P as of Friday Aug 28, 2009.

In addition, Demark studies also believes that a major reversal may be set to occur within the next 1-2 weeks.

I actually just came across the Demark studies and I'd have to say I'm glad I've found them because it just adds another tool to my arsenal. Seen pictured above is the TD Combo study. I'm still learning but from what I have gathered a purple 13 means look out for a reversal, and a green 9 says look for a correction. Amazing the weekly time scale called the March 2009 bottom. So I say lets give it a shot and see what it does this time around. Of course these indicators (RSI/MACD/etc. & E-Wave & Demark, etc.) aren't going to guarantee you the right side of the trade 100% of the time, but it's at least best to put the odds in your favor.

If you'd like to follow more detailed analysis on Elliott Wave please check out the following blogs:

http://danericselliottwaves.blogspot.com/

http://kennystechnicalanalysisblog.blogspot.com/

And if you're interested in Demark, here is one that I recently found. Reading through his analysis he seems to be pretty good:

http://dailydemark.wordpress.com/


Lastly here are some additional blurbs running through my head since I do not feel like writing a book right now:

• Shanghai Index down 6%, and we are lucky to go down .06%? How are we going to be manipulated next?
• Is the dollar going to hold trendline support, is it going to form a falling wedge, or is it just going to new lows?
• If the dollar rallies, commodities shorts will should be #1. 
• I'm staying away from financials and would rather be shorting the [over - extended] leader of the rally (Nasdaq)
• The Demark studies D-Wave also has said the top came in on Friday, coincidence?

Lastly here is an updated 1937 chart:

Marvel & Disney Merger

Big news this morning in the entertainment industry. Disney is acquiring Marvel Entertainment for a total of around $4bn in cash and stock. Marvel (MVL) shareholders will get $30 and .745 of Disney (DIS) stock for every share for MVL. Based on this and market inefficiencies, I have made an interesting trade that theoretically is risk free.

At the time of the trade, DIS is trading at 26.51 and MVL at 48.96. I have bought 50 shares of MVL and sold 50 of DIS.

Let us take a look at some math here. If every MVL shareholder is to get $30 + .745 DIS, how much is MVL worth according to these prices? 30 + .745*(26.51) = 49.75
This basically means that there is mispricing in either the DIS or the MVL stock. MVL should be trading at 49.75 or DIS should be at 25.44.

Over time, the market inefficiency will be eliminated (or nearly eliminated) and whether DIS goes down or MVL goes up does not matter to me. If inefficiency is not eliminated, I will get my $30 + .745 DIS which will be worth more than my short sale position and I can walk away with a small profit.

Edit:
After doing further calculations, I realize that I could have made this trade better by trading a better MVL to DIS ratio. As of now, it is obviously a 1:1 ratio. But according to the math below, this ratio should be 50:27

Here is why: If you can buy and sell the correct ratio, you are essentially buying and selling the same thing and should technically not have any cash outlay. Also, the movements in price will be more in sync.

To come up with the ratio, you figure out how much DIS stock you want to sell. I picked 50 arbitrarily. If you sell 50 DIS, you will receive $1325.50. Simply figure out how many MVL you can buy, in terms of DIS. I hope the below calculation will make clearer what I mean.

MVL Stocks to Buy = Cash from selling DIS/(.745*DIS Price + 30)
MVL Stocks to Buy = 1325.50/(.745*26.51+30) = 26.6=27

So, I SHOULD have sold 50 DIS stocks and bought 27 MVL stocks. That really messed up my trade, but I am still making profit looking at current prices ( I did adjust my trade and sold off 20 MVL shares for a small loss).

Of course there is only a profit margin of about 4-5% on this trade. But it is essentially risk free and has very low margin requirements (technically speaking none because MVL = DIS). Can you say arbitrage?

Penny Stock Plays For the Week of 8/31

PKPL UPDATE: Last week was a pretty solid week for PKPL, they locked up the joint venture that I was anticipating and as a result we saw prices run as high as .058 -- However, the interesting thing about last week was that all the action took place so immediately that we closed Friday on a strong 2 day pull back leading into the split which will seemingly take place after today's close (8/31). This puts us in an interesting situation, the price currently sits at .044 and I definitely think we still have room for atleast another 25% jump leading into today's close. HOWEVER because the joint venture has now been confirmed and the price has pulled back quite a bit, I have now shifted my strategy LONG. I think the future is definitely looking promosing for this company so if I don't see this 25% tommorow, my plan is going to be to hold. The few days after the split could still see large profits, although more often than not this is the period of selling off, as I had described earlier. Don't be alarmed, be patient, however you decide to go with this one, in my opinion, is a safe bet. Good luck!

ATNO: Another split? Why not! ATNO is preparing for an 11: 1 SPLIT and as you can already tell, I love profiting off of the short term hysteria that these things can create. This split is scheduled for close on 9/1 so i'm expecting tommorow and Tuesday to be strong up days, anything from .03-.045 is a very solid entry point. And again you can play this either way, (Long & Short) however here I am definitely looking for a nice short term flip. My goal would be to sell my shares at a high on Tuesday. Keep your eyes open for this one and Good Luck!

CWRN: Over the past few months CWRN has been one of my favorite stocks to follow, this is one of the more volatile Penny Stock's that I've run into, but it leaves a lot of room for profitabilty. This thing has absolutely no problem jumping from .0038 - .0052 in one day on absolutely no news (it's a bit wild like that). However, just the other day they dropped this bit of news on us -- Which in a nutshell says that -- they are meeting with China this week in Baja, California to discuss contracts for the shipment of their Iron ore, in addition, they will be sampling crude minerals for testing as part of their plan to get an environmental permit -- Yep, this could get interesting. As of now this stock is sitting at .0038, and during the past month or so of following this thing, I have not seen it dip below .0035 or so. This is a VERY solid entry point!! I typically play this stock both short & long, and my gut tells me that it has the potential to match the prices that were seen in March - May (.02-.07). Unless for some reason this visit in Baja isn't a success (or it is postponed) this is a very very solid play with some very serious profits looming!! Keep your eyes open... The news should be coming either this week or early next week. Good Luck!

Bearish?

Although I'm very well aware the consequences of fighting the trend, I continue to be bearish on the market, and I'm slowing scaling into shorts as we head higher. The past three days we've seen a somewhat bearish candlestick formation setup with two shooting stars and a doji. This could either be very strong consolidation or the beginning of the top.

One always has to remember the capitulation that should occur before a major reversal, however when you are up 23/25 days (not exact, but that's how it feels) and 7 out of the last 7, I'd say that's enough for me to think the permabears have exited their short positions.

Today on CNBC I actually started to hear comments such as the market is in need of a pullback, and the market is ready to go lower, etc., etc. We should all know by now that CNBC is the biggest permabull piece of garbage television out there and even a few of them are turning bearish?

I also subscribe to several newsletters and I cannot recall any being bullish in the intermediate term.

Lastly you have articles like this:
http://www.thestreet.com/story/10590765/1/kass-market-has-likely-topped.html

It appears everyone is expecting a pullback, it is just a matter of when. I'm sure when the volume from Hedge Funds gets back from summer vacation in September that none will be looking to go long at such extended highs, however I'd like to hope we pullback before then. We went from having abnormal days that went up and down 5-6%, to now having abnormal days that go up and down <.5% a day. (......zzzzzzzzzzzzz)

Lastly, I leave you with a chart showing the magnitude of rallies since the great depression. What it does is take the entire % movement of a rally or crash and give the percentage annualized. I figure this is a good measure to test how fast and how far we actually have come up. Amazingly we are around 200% annualized in the S&P right now, the 1932 GREAT DEPRESSION rally didn't even top 160%.

AEO Backratio Call Spread

Another trade I found using prophet chart pattern screener. AEO is American Eagle - another retailer that should have had a good earnings quarter because of back to school shopping. Additionally, yesterday's consumer confidence and retail numbers point to a stronger retail industry. On the other hand there is plenty of speculation about the retail sector being overbought. But, just like the overall market, the bulls are relentless in the sector. Thus, in the very short term, I am bullish on AEO, which leads me into my trade:



As you can see the stock has been trading within the rising channel for about a month. I am entering the position while the stock is at the bottom of the channel. I am concerned that there is a small bear flag within the past week and the earnings report could mean a breakout to the negative for this flag. On the other hand, the past two earnings reports catapulted the stock up significantly.

Overall, I feel the bullish signs outweigh the bearish signs.

The Trade
I bought a back ratio call spread:
Bought 10 Sep09 12.5 Calls for 2.35
Sold 5 Sep09 10 Calls for 4.70

If you do the math, turns out my total cash outlay was a whopping $0 (except commission). That's right, I am able to bet on AEO being bullish without putting out a single dollar. Addtionally, this also buys me some insurance if there is a bear flag breakout. If the stock falls below 12.5, my risk profile reverses and I start losing less. If the stock falls below $10, I break even for the trade. Once again, I am nearly direction neutral.

If the stock rises to around $16, near the top of the channel, I make around $500.

My max loss -at expiration - is $1250. I will not be holding on till expiration and worst case scenario will exit the position if there is a breakout on the bear flag.

I am actually unsure about how to calculate my percent return on this because any money I make (or lose) is technically infinite. My margin requirement is also 0 because I am hedged both ways.

Overall, the best characteristic of this trade is that it is free. Additionally, I am somewhat direction neutral and I particularly like that because there are chances of a breakout in either direction.

Penny Stock Play of the Week: PKPL

PKPL has a forward split currently scheduled for Monday, August 31st (note: it has already been rescheduled once, it could happen again... you've been warned). Nonetheless anyone who has had an experience with a forward split knows that the price tends to build up quite a bit leading into the split and then, of course, as the shares are added the sell off occurs. This split is scheduled for a hefty 10:1, meaning shareholders of record will recieve 10 shares for every 1 share owned. To be a 'shareholder of record' means that you would need to own stock before August 31st (however these stocks have a history of doing a rather inadequate job of living up to their dates, see: the recent AMNE split). My advice would be to follow the progress on this thing over the next few days and set a nice safe limit according to how this stock is reacting and pick up your shares before this Friday's close.

Now there are 2 ways to play this split... The short term play is my favorite and that's done easily by loading up on shares at a low this week (it could be now for all we know) and then selling off at Mondays high before the split occurs (remember, if the split for some reason gets rescheduled again you will see a relatively dangerous pullback, it's the risk we take). The other play is to go long in hopes of the split doing its job of enticing potential stockholders to bite at the lower price, producing higher volumes and a more interesting trading environment when 'the news comes' (information on the progress of their recently announced joint venture should be resurfacing within the next few weeks). However, take into account that you will be depending on your stockbrocker for the delivery of your shares, for instance if you have E-Trade, chances are it will take you a few days before you get your shares and by then most other brokers will have already distributed their shares and those owners will have probably sold out... However, if you are truely going long with this stock, this shouldn't really play much of a factor in your decision (unless the news comes in that 1-3 day span where you have yet to get your shares and you are screwed... again you have been warned). Like I said, I feel the short-term play looks best right now and it should be able to give you some nice bang for your buck, I'm forcasting a solid 15-50% short-term flip (depending on the markets awareness of the split, and how low you are able to get in)

Good Luck!

August 24, 2009 Megaphone Top?

Well we broke through the 38.2% retracement. I'm done trying to call a top, but how convienient would it be if the market decided to drop from here, after a fakeout to take out the stops playing the retracement?