Friday, October 31, 2008

Trick or Treat?

Well there has been a lot of choppy trading in the market since Wednesday rate cut. Seems like a tug of war between the bulls and bears as of late. We are definitely caught in a range, although it is rather large. The price action seems to be hitting the top end of the recent range of around the 975 level on the SPX. We are a tad overbought on short term indicators but there are a lot of noisy things out there today. Its Halloween, its friday, its the last day of the month, its the lasst day of the fiscal year and quarter for many funds. What dat mean? Well simply put, it can create irrational price action. We could see window dressing into the last few hours of the day where mutual funds dump their losers and bid up their winners so there final numbers for the fiscal year look "better". Now, since most mutual funds are long biased, then they probably dont have winners, lol, so watch for a quick selloff if we cannot break the 975-980 SPX resistance area.

So will it be a trick or a treat for the market going into the close? Bernanke just came on tv to speak about things we have heard a kajillion times in the last month. Not shockingly, the market responded with a nice pullback and now we are bouncing a bit but the charts look primed for a rollover if we cannot break over the 980 level. Watch for that but also know that if the volume comes in we could easily see a melt up to the 1000 area. Watch the levels and dont get tricked by Mr. Market when you knock on his door. The only other thing I feel confident enough about today is a recommendation to sell the Euro as it looks to be headed for another leg lower into next week against the dollar.

Wednesday, October 29, 2008

Helicopter Ben

Wow what a whipsaw Wednesday if I've ever seen one. The first half of the day was utterly boring as everyone watched and waited to see what the Fed would do. Big Ben came in and dropped rates 50 bps to a new rate of 1.00%. Hard to see them cutting much more than this so watch for a rebound in the dollar soon. Like I was anticipating after the cut (which was priced in after yesterday already) the market spiked down sharply then grinded up back to the low 940s on the ES futures. It was the unbelievably tight narrow consolidation in that area that caught my interest and I called for a long in the markets at precisely 3:14 pm et. The market rallied higher to the 970 level with incredible speed and volume. So much happened in the last hour of the day, lets try to break it down slowly.


First off how the heck did I know the market was ready to rally at the time I went long the futures? Look at the chart below of the SPX and notice the initial selloff after the rate cut, then we ran back up to the 940 level and stabilized. During this time we formed a beautiful bull flag (as I illustrated in the chart for you) while at the same held above those key moving averages. Simply textbook. I called for a rally once we broke out of the flag which was at the 945 level. At the same time we also saw the stochastic indicator stabilize and then curl higher as the arrow points out. When the stochastics start to point higher and spread out at the same time the market breaks out of a range after hitting a key moving average you must take the trade. The market exploded in warp speed from there and I was up huge on my futures trade in just minutes. Thus, I took profits a bit prematurely in the high 950s as I saw resistance coming and walked away smiling. Its these sort of high probability setups that I look for each and every day to pounce on in the futures market.


Flags are consolidation patterns that indicate a continuation of the most recent trend is ready to continue when the current retracement turns. Flags can be bullish or bearish and usually provide some of the best risk/reward entry setups out there. Volume confirms the move on most occasions and this time was no difference. Shortly after breaking out over the 945 level the buy side volume came furiously. Charts don't lie, people do. Listen to the charts and act when they give you a signal as reliable as a flag pattern. Plan the trade, trade the plan. Its as simple as that people. If you think about you will hesitate everytime and miss the move. Do your analysis then trust it and take action on your thesis.


Getting off on a tangent I know, but anywho; the market had that great run-up but it was stopped cold at 970 with a double top and extreme selloff into the last 10 mins. This is why, as short term futures traders, we take profits when we get them, as the futures offer up incredible leverage but you must not be greedy with it. So what happened in the last 10 mins. Well my first instinct was the normal hedge fund and mutual fund selling that has gripped this market lately. But it was then reported that GE ceo Immelt came out with some negative comments on 09 earnings. Nevertheless, it looks like this market has to prove itself once again tomorrow after the selloff. I am a seller underneath 940ish. But there is also so much pessimism out there that it could lift the tides higher into the end of week. Who knows, but as OSCAR points out here; 2 days up in a bear market equals sell more often than not! Obey those stops traders!

Tuesday, October 28, 2008

Shorts Get Creamed

Well that was a just about the most visciour short squeezes I have ever seen. The shorts really got the horns of the bull head on today, lol. In the last two hours of the day the SPX literally went from 860 to 940..thats 80 handles in the broadest market measure out there. The market was also down big in the morning and after making a double bottom from previous lows, the market never looked back. I took a long in the futures after we consolidated out of a nice bull flag around 215 pm et and shortly before the market busted thru resistance at 875. These are the high probability setups you must take advantage of in this market. If the market decide on a direction and then proceed to slowly consolidate into a flag pattern you gotta take the trade on that breakout because the market is telling you it is resuming the trend. But I did not see the rally catching such thrombolic speed and so I took my profits a bit early, lol, I'm sort of famous for that actually :)

This is a market where it pays to not hold overnight (or be completely hedged if you must). If you understand how to interpret what the charts are saying intraday this is the perfect for trading the futures and while the "Buy and hold" folks get whipsawed, the traders are making a fortune.


Anything can happen tomorrow and that should go without saying, with the Fed interest rate decision being announced at 2:15 et. The only thing I know for sure is that the day's action should be choppy and violent especially the closer we get to 2:15 pm et. Don't expect anything. Scalps would be my preferred method of trading the futures tomorrow and just remember we jumped 900 pts in the Dow so asking for more would be selfish. Not saying that we give this whole rally up either because I believe todays move felt different versus past rallies. There was something about the rally today that got me thinking "cautiously bullish". The up volume in the futures was incredibly bullish and you cannot just ignore something like that. I wonder if Uncle Sam was in there buying the futures? hmmm...

Monday, October 27, 2008

Bear Necessities

Well so far this week is turning out to be a trick rather than a treat for the bulls as the bears came swooping in for a late day kill. The day started off ugly as the ES futures hit an overnight low of 825 before bouncing back before the market opened and through the morning we saw a rally that sent us clear up to 890! Right after around 2pm et the market topped out at resistance and slowly sold off. The selling really came in hard and fast in the last 15 mins of the session as more and more hedge funds probably bailed. Closing down around 848 on the cash SPX is not the best way to start a week.

The best trade in this market continues to be selling any rally that shows signs of rolling over. Until we see some improvement in the charts then I would not be trading the long side for more than a quick scalp. It looks like we have more downside on the way. Today's last hour selloff will have me continue to have a short side trading bias into mid week more than likely.


The VIX had a range of around 66-80 today and closed at a new closing high of 80.06. Kind of scared to say but I wouldn't be surprised to see the VIX spike higher and challenge the 100 level if this market breaks down under 840 like I am expecting imminently. It seems like the VIX is still trading at a discount to the SPX 20 day historical volatility and that usually means it should not be considered expensive. I plan to analyze this further in a later post.


Overall, I am bearish but think we are going to see some choppy whipsaw action this week. Don't forget we have a Presidential election in one week so this will be on the minds of those with authority and I do mean the Fed. Will the gov't try to save the market again (and fail, again) during the last week before the election to alter public sentiment? Who knows. Just be ready for anything and only take the highest of probability setups this week. Trade safe!

Sunday, October 26, 2008

This Week's Trade

As we head into another week of trading we can be sure the volatility will persist. Like I said Friday, after the ugly gap down and weak finish at the end of the day, its hard to see the market not breaking down below 850 this week. Friday marked the lowest close on a daily and weekly basis since late 2003. We have retraced a significant portion of the prior bull market's advance and it now seems probable, in my opinion, that we head lower to test the lows of the early 03 period when the market hit lows around the 768-840 on the SPX. I could be wrong and this market may hold the 850 level and just grind around current levels but something tells me we have at least one more leg down to beware of.


This week's economic data to watch for includes Monday's New Home Sales, Tuesday features Consumer Confidence, Wednesday we have Durable Orders and the FOMC policy statement (more on this below), Thursday the market is greeted with Initial Claims and the first look at Q3 GDP. Finally on Friday we get a look at Personal Income and Spending, Chicago PMI, and Michigan Sentiment. With Fed meeting set for Wednesday this week it should be interesting to see how the market trades ahead of the statement. It's tough to see them not cutting rates again, but it really doesn't matter anymore. The market has been telling us that all along. It is far too late for this market to be saved by rate cuts because simply put, the Fed waited too long and did not act upon the current credit crisis at the first sign of trouble. They waited to bandage up the wound when the patient was already shot and bleeding to death, instead of backing the endangered patient when the troops first attempted an attack (the housing bubble bursting). I do not think a rate cut will do one damn thing so please Ben Bernanke, take a stand and do not cut rates.



Looking at the VIX chart I would like to see volatility come in and actually break beneath the 20 day ma to feel like this market can rally more than a whimper. The 20 day has been support and kept the trend higher since way back before Labor Day if you can believe that. The 20 day ma now sits around at 57.67 and it is clear that even once we come down below that area there will be a new norm in volatility, where the floor may be around 35-40 instead of the past 20s. For traders this is great as our objective is to simply play the volatility intraday for the wild swings it produces.


I think this week it is best to keep our scalper's mentality when trading. Taking sizable quick gains is the best way to go in this market and has worked quite well for me in the ES futures lately. I will be trading the futures from the short side more than likely to begin the week but this is likely to change as I am expecting another choppy up and down market that will be hard pressed to establish a trend. Support below is 868, 853, 843, 837, 788, 770. Sell into resistance at 875, 898, 915, 920, 930, 939, 945, 955, 963, 980, 1000.

Dennis Gartman's Not-So-Simple Rules of Trading

Dennis Gartman is one of the greatest traders in the stock and commodity markets of our lifetime. His expertise in the fast moving futures markets and 35+ years experience in trading is priceless. It seems like I learn something new everytime I hear him speak. That's why I wanted to share with you his rules of trading and encourage other traders to review them and most importantly, obey them. 16 rules in total, they are simple but oh so hard to actually train the mind to adhere to and respect. However, if you can master these disciplines then you'll be a smarter trader and more successful in life overall. The rules that Dennis has come up with during his years of trading are so useful that you can read them and instantly be able to analogize and apply to other challenges or problems in life as well. Here they are in entirety:



DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING



1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin. Count on it!


2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.


3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.


4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.


5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.


6. “Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent.” These are Keynes’ words, and illogic does often reign, despite what the academics would have us believe.


7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.


8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.


9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In “good times,” even errors turn to profits; in “bad times,” the most well-researched trade will go awry. This is the nature of trading; accept it and move on.


10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here!


11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, “When they are cryin’, you should be buyin’! And when they are yellin’, you should be sellin’!”


12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.


13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow… usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.


14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year… and our profits grow accordingly.


15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a “secret” to trading (and of life), this is it.


16. All Rules Are Meant To Be Broken…. but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.

Friday, October 24, 2008

Sugar, We're Goin Down!


Wow what a day in the markets. I never was convinced on the rally from mid morning onward. I took a nice short in the futures around 1:30 pm et and covered for a great trade shortly thereafter. You really got to have a scalper's mentality on days like today. I shifted away from my short side bias after the 15 and 30min SPX chart started to perk up but in the last hour of the day there was some serious choppy action. Right at 3pm et huge buy volume came into the ES and pushed the futures up about 25 pts in minutes. Everyone got a little happy that we may have a positive close on the day and maybe salvage a decent weekly close. Not quite sure who the hell was buying all that paper at 3pm et but its irrelevant now as the market used the last 10mins of the day to sell off from roughly 890 to 865 on large volume.

This is not a good way to finish a week in which many hoped we could bottom out after testing the lows from Oct. 10th. I hate to be the bearer of bad news but I think we are going down next week. Today was almost like a wasted day because any rally that had hope just faded away. Some think we should have had a bigger washout at the open when the futures were limit down. So another 300+ selloff is almost like a cheap trick that the market is playing on the optimistic. Art Cashin was on today talking about some kind of lunar cycle in astrology next week. He claimed (quite seriously) that these planetary shift or whatever the hell is going on, lol, might signal a bottom. Ok I'm sorry I'm not an astrologer, but I do wanna check my horoscope now thanks to Mr. Cashin, lol.

Anywho, I'm a chartist so regardless of what the heck is going on with Mercury and Venus I see a breakdown coming next week and if we cant hold the 845 level we may see things unravel at rapid speeds. There was nothing bullish about the way we closed the week and I just dont quite see why this market would go up Monday. Anything can happen of course but I just have a feeling we see lower prices next week and perhaps, just perhaps, this time we get a true washout without the aid of the gov't artificially creating a floor.

Enjoy the weekend people. Get outside and breathe in some fresh air with family and friends!

Whoosh!


I wanted to do a mid-morning update here with the volatility out here. Futures were limit down overnight. We are recovering well off the lows of the morning right now. As I speak I see the futures printing 870. If we cant surpass the 875 level this market is goin lower. We are simply seeing mass liquidation and I dont see it ending today.

Euro hit low of 1.2479 this morning, the pound hit 1.5224. The foreign currencies are just falling apart, except for the yen of course which is actually having another great week. Dollar is at its best levels in nearly 3 years and this trend will continue. The sad part is that 95% of America has no idea of this huge new bull market in the dollar and probably will not hear of it till its nearly over.

Also oil is getting slammed down this morning after hitting a low of 62.95. Contrary to popular belief (yes CNBC), this OPEC meeting in Vienna means absolutely nothing and they can not stabilize the price of oil no matter what. A market will go where it is destined to go. If they create a pop in crude, its made to sell into.


Precious metals are seeing selling as well. Gold hit a low of $681/oz overnight before recovering to current levels of near 715. Silver has dipped under $9/oz. The gold bugs are screaming and you know it, lol. This whole move down in the commodity and metals space is indicating worldwide DEFLATION and slowing growth for years to come. Prices will continue to drop. So enjoy the fact that you will be paying much less for goods like food and oil because your assets will be worth less as well.


Ok back to the markets. We are now seeing the ES futures hitting 880. We are seeing strength move into the markets even more so since I started typing this post. Above 890 and and we could actually reverse and close higher on the day but I am not convinced just yet. Watch the VIX today. The chart to the left is a 1min since todays open. It has pulled back off its highs drastically already. At the open the VIX hit 89! It has pulled back all the way to 75 so if this can pullback even more then we can fuel a late day rally but dont get your hopes up. At this point I believe it is inevitable that this market break the lows of two weeks prior and make a new washout to the downside possibly breaking the 800 SPX level, but this may take a bit more time to pan out. But for today it is once again a great trading market so take your scalps when you get them and obey your stops!

Thursday, October 23, 2008

Don't Stop Believin'


Well that was a roller coaster if I've ever seen one. SPX started the day near 900, rallied in the first few hours up to 920, then fell off a cliff to 860 and by the last hour of the day staged an unreal rally that ended around the 910 level. Seemed like the last hour rally was massive short covering off an oversold condition. It was almost as if the Plunge Protection Team themselves was in the pits buying the SnP's on the offer, so don't stop believin' that we can rally I guess, lol.

I took off my SSO puts yesterday at the close for a handsome profit since Tuesday's inside day pattern. This was part of a strangle I initiated by going long both the Nov 35 calls and 32 puts. The puts doubled and then some in one day! The value of the puts that I sold surpassed the total cost of the strangle I started with originally so essentially I am now holding "free" calls that have 4 weeks to make money and my worst case senario is I break even on the entire strangle. Now that's what I call a good risk/reward.

Overall the close was positive and strong enough for me to start to develop a new bullish bias going into Friday. However, if we can't get over that 920-940 level with volume tomorrow then todays buying into the close means nothing. We need a continuation Friday to confirm what we saw today. Then, maybe we can look for more upside next week. But honestly I hate to think of next week when its still 4-5 days away lol. This market can do so much by then to change things.

Bottom line, the trend is still down on the daily, 60min, and 30min charts so dont fall in love with the upside traders, I dont care how magical CNBC makes it out to be. Trade safe.

Mr. Softie


So as we see Jerry Yang take a visit to the MSFT campus today in the picture to the left, lol. We wait for "the number". MSFT reports after the bell and as I type it sits at $21.50 a share. Cant believe it has gotten that low honestly. I would love to wave the all clear sign and say buy buy buy. But as much as I'm an optimist, I'm also a realist.

Tech spending does not rise during a recession so I would be of the opinion that MSFT could struggle in the near term. But overall I'm a chartist and technical analyst so lets check out the charts. 52 week low is all I need to say. MSFT is in a nasty downtrend that will take months to break out of. You gotta go back about 2 years to see MSFT around the 21 level. If it cant hold these current levels then it doesnt look promising as this thing can easily dip into the 18-19 range. Hopefully that doesnt occur, but like I say hope is not part of the equation.

Options activity has been concentrated on the Nov 22 calls today so far with already 6 times the open interest traded. Front month ATM implied volatility is in the mid 80s which is unreal for a name like MSFT. However, it may not be "too high". 30 day historical vol is up around the same mid 80 level, so in my mind whenever you get HV at or above the IV then volatility is a buy until proven otherwise. So in other words I would stay away from vol selling here. Until I looked at the volatility chart below I had no idea MSFT spiked up so high in vol during the past month. As the chart shows MSFT stayed in the 30s IV for a longgg time. This has truly been an amazing time to be a trader in the markets. Its oversold as heck but in this market, oversold means nothing. While we could see a bounce in the name tomorrow I just dont see any sort of strategy that rewards you for the risk you take. If you wanna gamble then maybe a 22/24 call spread would suit you.




So overall it should be interesting to see what MSFT says about demand in this environment but dont be a hero and buy into earnings, I never met a 52 week low that I liked. But Jerry Yang on the other hand? Well he owns one in YHOO, lol.

Wednesday, October 22, 2008

Mac-O-Lantern


Well its official, even during a recession Apple addicts will still go out and buy iPhones, iPods, iMacs and other i-stuff. Lol, ok seriously I got nothing against AAPL..I actually love my iPod Touch and love to trade the stock even more. Its usually one of the more exciting names to watch after an earnings number. This time no different. Looks like the stock is going to gap up at the open and start the day around the 100 level (up 12%). Which was coincidently the most actively traded strike on the call side in the Nov series on Tues. Hmmm, lol.

Anywho, kudos to Steve Jobs for showing up to the conference call this time around. Oh and delivering a decent number for the quarter. Keep in mind that AAPL has been taken out back and sold off pretty violently with the market lately and especially since the RIMM quarter was announced. However, I would not be surprised to see AAPL trade higher in the coming weeks and months but dont expect anything too explosive since this market pretty much sucks.

Getting back to the options trading today. I mentioned the Nov 100 call had the highest volume on the day. 3 times open interest in fact. I usually try to stay away from "gaming" earnings reactions but if I were to, the options pits are where I would look for clues first. Usually in the last hour of the day you start to see some kind of institutional sized action. Whether its straight call buying, spread action, or straight up volatility selling. The options in AAPL are so pumped up with IV that its tempting to do some kind of volatility selling or credit spread. The front month ATM implied vol on AAPL sat around the high 80s Tuesday (down from the 110 high a few weeks ago). That will get smacked down at the open but it looks like the guys that bought long calls or call spreads or maybe even strangles will get a big enough move in the stock to offset this caving in of premium, and thus have a nice pay day in AAPL.

Adam from Daily Options Report had some good thoughts on AAPL pre-earnings and how he would trade the volatility here.

Tuesday, October 21, 2008

Turbulent Tuesday


The market never really showed much strength today from the get go. The charts started to rollover after the 10am ET time and the futures sold off before rebounding multiple times all the way back to break even but the bounces were suspicious in my mind when I noticed that the futures had a hard time breaking thru the moving averages on the pivotal 15 and 30 min charts. The market just never really had anything going for it all day. Each attempt at a rally was sold into and finally the market broke down in the last hour after we gave up the 975 level.

Another great trading day with moves to bank on if you are watching your charts and keeping your emotions in check. It seems like yesterday we exhausted all of our gas in a low volume rally and today the big boys came in and just sold into those resistance areas.

Yesterday I mentioned that we came within a few points of confirming an inside day pattern on the SPX. Well, oddly enough we had an inside day pattern TODAY. I zoomed in on the daily chart above to illustrate this inside day pattern and also I outlined an interesting little symmmetrical triangle I identified. These triangles show the price action tightening into a narrow range over a period of time and eventually breaks one way or the another when it reaches the apex. On top of this we had an inside day pattern which is a very reliable pattern that predicts a breakout. Usually I see inside days begin a reversal. I am now slightly a bit more bearish looking at the short term, after all we just did have a 3 day rally in the SnP's that went from 870 to 985 ish. This market can easily trade down to the low 900s but I would prefer to see that level hold, however I gotta call it like I see it, and if we cant get over todays highs with volume then I will be shorting this market midweek.

After the bell, AAPL reported some decent numbers but dismal guidance (they always sandbag the upcoming quarter so its easy to beat). Anyway, the stock first blipped down into the 80s but closed the after hours session up a strong 13%. This is giving the Nazz a nice push up after hours and could definitely give us a positive open but just watch to see if any rally can sustain itself to determine if you should buy into it.

Monday, October 20, 2008

The Bulls Are Back in Town


Well the bulls sure had their day today. Like I was expecting the market rallied up hard today. Though volume was not impressive we closed the SPX at 984 (just a few points above Friday's high which technically was setting us up for an inside day pattern today until the last hour). I would have liked to see this inside day pattern complete itself today and possibly see a monster rally heading into tomorrow and mid week. The last hour we were able to break through that 970 level on the futures and that propelled us to melt up into the close.

An inside day is formed when the entire day's price range is within the inside of the previous day's entire price range. If the SPX closed about a point lower than it did then we would have this pattern confirm. This is a fairly rare but very important candlestick chart pattern that usually illustrates that prices are tightening into a narrow range and you should expect a break in the direction with the strongest momentum within the next few days.

With that said, I still think we can continue this rally and go higher the rest of the week but just watch the 15min and 30 min charts of the SPX or ES futures to recognize any signs of weakness or an impending pullback. I usually watch these timeframes to dictate my bullish or bearish bias on an intraday trading basis. Levels on the SPX that should be watched below are the 940s and 960 level as support. Over head resistance sits right around where we closed here at 985 and also up at 1000, 1020-1025, 1040.

The reason this rally feels a bit different to me than the fakeouts we have seen is that finally today we saw credit spreads narrow significantly and that simply means that short term loans for large companies got much cheaper and easier to obtain today and thus its easier for you to borrow money as well. As long as the credit markets start to operate more efficiently over the next few weeks we could see the fear calm down. Talking about fear, today also saw the VIX drop a full 17 pts to read "only" 53 at the close. While off the highs of 80ish last week this current level is still above where it was after Sept 11th so that gives you some perspective.

If we can get some cheaper volatility out there I would be looking to go long options much more than I have been lately so I will let you know what I find out there. Trade safe!

Sunday, October 19, 2008

This Week's Trade


After a pretty volatile week last week we finished up 4.6% as the SPX closed at 940. Although this was acceptable it was well off the week's highs of around 1040. I think this week we could have some upside momentum that pushes us up towards the 1000 area on the SPX. Last week's key outside reversal day was pivotal in my mind and as long as we hold the 900 level on the SPX I think we could be grinding higher. Not expecting anything explosive to the upside, or downside for that matter; but rather a calming of the volatiltiy to where the VIX may read somewhere closer to 45 instead of 75. I do not expect this market to trade of out of the 900-1100 range for a while.

I'm seeing more and more signs that the bottom from Oct 10th could hold as an important long term low. If thats the case then I would expect to see continued apathy and dejection from investors. After a long term low is put in everybody that capitulated into that panic bottom then feels dejected and unmotivated to do anything. They would rather go have a beer and come back in 3-6 months to test out the waters once again after the initial depression wears off. This is a period of apathy that the markets experience and usually form a range that can stay fairly wide and volatile, but the primary feature if this period is a lack of trend. I could be wrong but this is my current interpretation of where the action is headed.

That being said we have a light week on the economic data front with just some inital claims coming out Thursday and existing home sales for Friday.

I think the headlines this week will be centered on earnings season and more than likely, the lack thereof. Last week's surprises came from Intel and Google and this could mean that estimates are a bit too bearish on some of the tech names out there reporting this week. AAPL reports Tuesday after the bell. On Wednesday AMZN and BIDU report. Thursday MSFT gets its turn. These are just a fraction of the interesting companies reporting their numbers this week that you should watch to see if the recession is having a large effect on their businesses. I never trade earnings because it is a crapshoot but if the market closes strong on Monday we could have a nice run-up in these names heading into the numbers.

Overall I am bullish on the markets this week above the 920 level in the SPX, underneath that I may look to be more short biased. Assuming we hold the support underneath us this week I could see us rising back over 1000. Sell into resistance in the 970, 985, 990, 1020, 1040 areas and dont fall in love with the upside no matter what traders! Trade safe out there this week.

Saturday, October 18, 2008

Going Out On Top

Talk about going out on top. Andrew Lahde, manager of the small California hedge fund, Lahde Capital has shut down his fund after his 1st year. Not because he went belly up but because he says after returning 866% in his first year, he hates the hedge fund biz. Andrew was able to see the subprime mortgage crisis happening before it even began to show its effects the last few years. He cashed in big time in the last year after shorting and buying puts on all sorts of troubled institutions. Anyway, if returning 866% in one year doesn't impress you, then I assure you that the goodbye letter he wrote will, so here it is in its entirety:


Today I write not to gloat. Given the pain that nearly everyone is experiencing,
that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging
fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don’t worry about my employees, they were always employed by Mr. Springer’s company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life — where I had to compete for spaces in universities and graduate schools, jobs and assets under management — with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government.

Capitalism worked for two hundred years, but times change, and systems become
corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken.

Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won’t see it included in BP’s, “Feel good. We are working on sustainable solutions,” television commercials, nor is it mentioned in ADM’s similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country?

Ah, the female. The evil female plant — marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell
you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let’s stop the rhetoric and start thinking about how we can truly become self-sufficient.

With that I say good-bye and good luck.

All the best,

Andrew Lahde


Well lets all just try to take a lesson from Mr. Lahde's highly opinionated and awesome letter. There needs to be changes in this country from the top-down. People should be held accountable for their responsibilities to a much further magnitude, whether its in DC or corporate America. So, now I ask who is gonna step up to the challenge?

Friday, October 17, 2008

Options ex Friday


For an options expiration day I think the market actually behaved fairly well and aside from the pullback at the end of the day (and that's all it was), I think the market had a constructive week that we can build upon next week perhaps. From the bottom of the range yesterday at roughly 8200 on the Dow to todays high of around 9200...this market deserved to selloff in the last hour. Again, how can you fault the decisions of those who sold into the weekend on the heels of a 1000 point in the Dow in roughly 2 days? You can't.

With options ex today I was also surprised to see a relatively calm atmospehere to the price action. Usually you see either a chopfest all day long or just massive swings intraday. But I guess since that is now the norm, lol, it makes sense to see options ex present us with something a bit different. The market never ceases to amaze me.

Had some great earnings to GOOG last night after the bell so that was encouraging to see that the recession is not completely killing advertising spending. Next week the earnings calendar really gets going and I will try to go over a detailed outlook of this over the next few days.

Given that options ex is a bit quirky usually I would like to see the action Monday to determine where this market wants to go but as of right now I am liking what I see on the daily chart after yesterdays outside reversal. The 60 min and 30min of the ES futures look more bullish than they have in weeks imo. If the SPX can gather some steam and hold this 900-920 level with authority then I will be advising some trades to the long side. Also, if we can get this VIX down a bit lower to like the 40s or so then I would finally be willing to throw out some new options trades. Lately, I havent been holding much of anything overnight unless I'm hedged completely because it simply hasn't been worth the risk. Especially when you can make a fortune during insane intraday swings we have grown accustomed to in this environment, then go to sleep in cash. :)

With that said, I will be looking to research a few names over the weekend to perhaps recommend some great options trading ideas for the coming weeks. If you made it through this week, congrats, you are no longer an amateur! And to all the new readers thanks for visiting The Trading Pit during your day.

Thursday, October 16, 2008

In a New York Minute...Everything Can Change


Well, its been a busy day on my end so that's why I haven't been able to post till now. My trading and watching of the markets during today was cut short of the norm because of other obligations I had to attend to but nonetheless, that was one hell of a outside reversal, wasn't it?!

An outside reversal is a day where we gap down (starting lower than the previous days close) and reverse mid day to close near the highs and today those highs were substantial. From bottom to top today we rallied about a good 750 points or so. This kind of reversal pattern is quite bullish normally and I would expect it to give us a boost into the next few days.

My main observation today was that there seemed to be a "wall of worry" effect in the markets. Everyone was very bearish after we gapped down hard, we saw the VIX hit 81 at its peak early on, credit spreads narrowed (more so in the afternoon). And with all that there was nothing announced that was dramatically worse than yesterday. Initial claims actually came in slightly better than consensus, but still high. Yet, it seemed the negativity had soared overnight for no material reason. This is the "wall of worry" effect and it usually builds to a point where the fear just cant be justified by the price action so the markets start to grind higher and eventually it squeezes the shorts into covering their bad bets.

The rally really took off today after the key 220 pm ET reversal area that I watch for each and every day for a possible change in trend. We raced into the close to finish with the SPX around 946. We are still well below the 1020 level I am watching for this market to retest eventually and perhaps form that larger inverted H&S pattern on the 60min chart I outlined in yesterday's post. Its not out of the question that we race towards that level in the next few days, especially since weird things can happen on options ex day. I tend to think the market will be stuck in this current range (SPX 890-1000) for the next month or so. I dont forsee any huge rebound above this range, nor do I see a break of last week's lows occurring.

With that said, Friday is options ex and that day is famous for being one with choppy waters, and sometimes even better to not trade. However, if today's burst of buying continues you can see a heck of an exaggerated move to the upside. Trade safe and remember in a New York minute, everything can change!

Wednesday, October 15, 2008

Rejected


The chart to the left tells the story today as the market got rejected from making any attempt at surpassing the key moving averages on the 60min chart. After 2 sharp up days after a key reversal in a bear market you should expect the market to retrace as the always informative Oscar explains here. The day started with bad retail sales and it continued when Big Ben came on tv to talk down the economy, again. Its really amazing that these guys think they need to keep coming out during market hours and speaking about how bad things are. We get it! Anyway the selling accelerated into the close as the SPX ended the day down around the 905 handle.

This selloff was more than I would have liked to see (I was calling for a retrace back to the 920-940 level). As ugly as today was you gotta remember that we are still well above the lows of last Friday and as long as we hold that 850 level in the SPX then we can hold our breaths. The volume today was not too impressive for a point loss this large. NYSE volume posted a pretty average 6.5 billion shares (compared to the 11+ billion we witnessed in Fridays whipsaw).

I posted this chart trying to illustrate the 2 choices that I believe the market has at this point. I realize there is alot going on in this chart but bare with me, its crucial. First off the chart goes back to last week and you can see the downdraft we had followed by the 1000 pt rally Monday. I put on a nice Fibonacci Retracement and you can see that we have retraced a bit more than the preferred 62% I would have liked to see. Nevertheless the arrows pointing to Fridays support levels represent areas WE MUST HOLD. It appears the market wants to retest the lows of around 850 much faster than I would have liked. Obviously, if we break beneath last weeks lows, you do not wanna be long, lol.

On the other hand, the only positive I see is that there exists a potential for an inverted head and shoulders as evidenced by the circles I have drawn in. The thick white line above is the neckline of the pattern, or the resistance that will need to be broken in order for this market to rally higher. The levels to watch on the upside are 1020-1040. Of course this inverted head and shoulders has not even formed yet and would still have to complete the right shoulder to even be considered as a trade idea. However I noticed it as I analyzed my charts and I wanted to bring it to your attention so its on your radar.

I would say that after today I'm neutral on the markets until this range is broken out of; probably a 60/40 bullish bias if I had a gun to my head. Trade safe!

Tuesday, October 14, 2008

Rally Time


So before I go into where I think the markets are going into midweek, let me just ask the monkey on his thoughts of a market rally.

Lol, well unless you go to that site then you have no idea what I'm talking about. Anyway, the rally monkey is always right and kudos to Adam at Daily Options Report for bringing it to everyone's attention one day before the biggest rally known to man.

Ok, seriously lol, not a slam dunk that we get a sustained market rally into the end of week but one thing could be pointing in that direction. Its options expiration of course, and that means the moves can be exaggerated to a degree. On these weeks I tend to see bullish action and the end of week moves follow the early week's to some extent as we watch the option shorts and longs battle it out for positioning. Options ex is notorious for whipsawing traders out of their positions so I would expect a choppy market these next few days with volatility abound.

As for levels the SPX opened up on steroids this morning as the futures were literally trading around 1060 (we were at roughly 860 on Friday morning to give you some perspective). We got a nice little selloff after the open but seemed like we wanted to hold the 1000 level and we did. Until about 1:30 pm ET. That's when I saw a bear flag developing on the 15min chart of the futures and got the signal to go short the market. It worked out well as we then dropped to nearly 975 on the futures before recovering most of that retracement by days end.

So overall, I would interpret this as constructive profit taking, and we didnt close near the lows which is always something good. I wouldnt be surprised if we retraced some more of Monday's insanity the next few sessions but as long as this market stays over the 920-940 area on the SPX I would expect this intermediate term snapback to feed upon itself and continue in the coming weeks. Trade safe out there.

Flip-Flop, Hooray?


So in yet another amazing flip flop Goldman Sachs has revised its oil outlook from a $115 target by years end to just $70, with a possibility of $50. This is thrown in there after oil has of course already come alll the way down to $77 as of last friday (bounced up to 81 Monday) from the all time high of $147 in early July. Yes, you heard it right, Goldman has predicted the price to be $70 by year end. Going out on the limb there dont you think there guys?

Ok I'll give them credit for calling the run up to $150 last spring but this latest call is just another example of why listening to analysts will never make you any money. Oil has lost 48% since the peak was hit just 3 months ago, pretty much a slaughtering. And NOW these professionals come out and say they think its going to $70. ARE YOU KIDDING?! What a joke.

It was clear the trend in oil (and commodities for that matter) was over when crude broke thru $120 and even before that you could see that the BRIC story was a scam that was pushed a bit too far. That demand from emerging markets was already slipping before crude had its meteoric rise. The Baltic Dry Ship Index (the index that tracks the cost for shipping rates that big bulk shipping carriers to transport dry goods) had started to crash from the peak in late June and clearly pointed to a slowdown in the global economy before any fundamentals showed their heads. Anything that is used to feed global economic growth was dropping in price. And quite rapidly infact. And so where was Goldman?

Oh they were waiting to tell their clients about the revision to their forecasts of oil till it lost nearly half its value. This is a great reason why every individual investor should be able to do their own due diligence or not play at all. Read a book. Educate yourself. You can do the analysis yourself and let the analysts make their bad calls as they use their complex financial models to no avail.

Ok, enough of that. So what do I think of crude right here? Well, when it was over $130 I was saying there is a very real possibility it can come down to $87 by Dec. It blew right thru that and hit $77 last Friday. Looking at the chart I see a broken commodity which means the downtrend is in full effect. I wouldnt be surprised to see a bounce in oil here around the 75-80 level because you have the 200 week moving avg. just below. However, I wouldnt count on it getting back over $90 right away. It has plenty of support down here around the 75 level so I would assume it trades sideways for a little while but eventually may head into the 60s if it cannot hold the 75-77 level.
Bottom line is that you soon will be seeing gasoline at a local pump near you around $2.50 or less. Never thought I'd be happy about that a few years back, but hey lets smile. :)

Monday, October 13, 2008

Just What I Needed?


Nothing like a nearly a 1000 point up day for the cheerleaders on CNBC to proclaim they were right on the bottom or whether this and that happened the way they called for. Folks like Dennis Kneale and other bobbleheads that flip flop like a fish on a slippery dock will probably feel vindicated this weekend at their NYC cocktail parties that they "called" the bottom in Citigroup or they "knew" the VIX wouldnt rise further. But what purpose does this actually serve? None.

See Mr. Market showed the average Joe a painful lesson today. Sell into the CNBC induced panic last week and then completely miss the mother of all short squeeze rallies in the face of watching the very people on financial television who panicked you outta the market last week, cheer the market all morning long as if the world changed over the weekend. This basically proves that you cannot and should not sell into any sort of market panic. If you have waited thus far to sell whatever you hold, then youre better off holding off the panic button and waiting for the snapback rally that invariably comes everytime. You most always get a higher price to sell for if you wait, if getting out is your objective.

I've never seen CNBC go this fast from panic to euphoric over one weekend. Its really incredible that they call themselves "unbiased" on those commericals they produce.

I would remind you that we just had a 1000 point rally in the course of a day. 104 handles in the SPX. Which is just unheard of. We should take a breather Tuesday...hell maybe even lose a couple hundred points. *Gasp*. It would only be healthy for us to retrace a third or even half of todays gains. Some would say we need a confirmation day but I would argue that we had about 3 in one today, lol.

It does look like last Friday was some sort of intermediate term bottom marked by all the classic contrarian signals. But whether or not we race higher from here is another question. I doubt it. We still have major issues. The unfreezing of the credit markets would be one thing that can give this rally legs. However, if I was a betting man, and I am, then I would say that we trade in a wide range thru year end and attempt to establish some sort of basing pattern with an eventual retest of last weeks levels probable. Bottom line is that this remains a day traders market and we like it that way!

Sunday, October 12, 2008

This Week's Trade


So the SPX futures are up a cool 43.5 pts as I type Sunday evening and barring any crazy news overnight (which is a normal occurrence these days) then we should have a monster gap up at the open. The question will be whether it is sticks and you should buy into it. First off, I would say to NEVER buy a gap up, or sell a gap down for that matter. Usually you see these things fill the gap during the first few hours of trade. If the market wants to go higher it will tell you that by showing uninterrupted strength all day.

Friday evening Hank Paulsen said that the US gov't will try to take major stakes in US banks and this was followed by the ECB saying that they will do whatever it takes. Hmm, heard that one before. Doesn't sound too bullish for the Euro currency imo.

Last week we saw about the worst percentage losses we have ever seen. Down about 18% on the SPX and if not for that huge rally in the last hour then we would be talking about a 23% loss for the week. As much of a downtrend we are in, I think it is so overextended that I will be looking to have a more bullish bias on my trades this week. You know we have to snapback very soon here and at least have a sharp retracement of the previous few weeks of losses. Getting back above 980 would be bullish and if we surpassed the 1020 level this week and hold it I think that could confirm a follow thru to the upside. Both of these areas will provide us with tough resistance and thus should probably be sold into rather than bought into hoping for a breakout.

The only sure bet is that volatility will be abound. Check this out. Even if the VIX, which closed Friday around 70, would get cut in half this week then it would still sit at a cool 35--a level we perceived as unbelievably high just a month or two ago. As traders we love this volatility because movement is the only way to make money in the markets. But with this comes a price. The pricing of options has gone thru the roof recently. As the VIX rises, the implied volaility of options goes higher, making the overall premium you pay for options much higher. So you just need to have a concept of the premiums you paying up for when you do go long some options.

I really dont have too many trading ideas in individual names for the coming week because of the extreme volatility out there. Just know that a rising tide will lifts all boats. This means that if we have the rally that I am anticipating this week then pretty much any decent stock out there will rise so you are probably better off just buying the QQQQ or the SPY to get exposure to a broad-based rally this week. Trade safe.

Friday, October 10, 2008

Welcome to the Jungle


What would Axl Rose do in these markets? He would probably say go long the market because this G7 meeting over the weekend will solve all our problems!! Um no.

Unless something extraordinary comes out of this meeting over the weekend (which is what the market is pricing in now with the insane rally in the last hour of the day today that lifted us back to breakeven essentially) then I say we come right back down Monday morning to todays lows and finally have the long awaited Monday-Tuesday washout that smart folks like my main man Art Cashin have been calling for since June.

I keep saying that government intervention does not create stock market bottoms in the long term. It only provides a suckers rally that usually comes right back down. I only see one thing that could be announced from Washington DC or for that matter the G7 that would actually be constructive to restore confidence in the eyes of Americans and their investments.

They need to come out and say,

"We are buying SnP 500 futures because we will not let this market go lower. We have met with top money managers and hedge funds from Wall Street and have come up with a plan to clearly show this market has value and is a fundamentally long term buy. We will continue to buy US equity futures to show this value until it is recognized by all who have lost confidence."

The public is scared to own stocks. Period. Yes I know the credit markets are frozen and businesses cant borrow money but the panic in the markets is because of public fear in the eyes of the average investor in middle America. Fear that we have not seen in decades. I dont think 9/11 even measures up to this quite honestly. Confidence needs to be restored and you will not see that until officials put their money where their mouth is.

That being said, I believe we could see something positive next Monday. You should be moving your 401ks back into stocks right now, assuming its not already. This may be the greatest long term buying opportunity we have seen in decades. But you wont make money if you wait till things are rosy again. Dip your toes in now and then scale in further as we recover.

Since this s*** began I have said the bottom will come when all these morons on CNBC stop ASKING whether or not we have reached a bottom (Yes, Dennis Kneale and Power Lunch I'm looking at you).

If you study bottoms and extreme panic anytime the past 20 years, you'll see that bottoms are only formed once everyone is too tired of calling "the bottom". At true bottoms, everyone is in so much pain from riding their stocks into the ground that they have essentially given up on "bottom-calling". The last day or two has been the least amount of this questioning on CNBC, which tells me they have given up.

Its time to buy stocks people, dont tell me I didnt warn you in 6 months or 1 year.

Rock-tober!



First off, just wanted to update the GLD trade. This trade did not break out of the area I wanted it and reversed during the day Friday. Since it did not break out I never took the trade but if you did then you should have had your stop in there and thus be out of the trade now.

So anyway, the sky is fallin' isnt it? Thats what the bobbleheads on tv tell me at least. These are historic times and all you need to do is look at the VIX to see what I am talking about. The VIX (the broadest measure of fear and pessimism) has hit unthinkable levels. With a little more than an hour to go in the trading session the VIX is at 75. A month ago if you told me we could even hit the 50s I would say youre nuts. But 75 is truly something we may never again see in our lives. The only other time fear was higher in our modern world is 1987, but there was no actual VIX back then. Someone went back and did the calculations and it turned out the equivalent would have been a VIX of 150 or something crazy like that.

The market is not bottoming today even though it may have felt like it this morning when we gapped down 600 on the Dow then literally came back to breakeven an hour later. I think we will see another redemption selloff Monday after folks get their mutual fund statements over the weekend and cry over the losses that they are sitting on. This will make then call their brokers on Monday morning and say sell my stocks, I want my money back. Monday could be a scary day if this happens. Nonetheless, I think we either bottom on this event Monday or Tuesday. I do not think this selloff goes further than that. Once this happens, hopefully without the use of government intervention, then I think we will see a massive 2000 point rally in the Dow within weeks if not days.

Bull Flag Breakout of Gold?


Gold might be setting up a nice break to the upside from the looks of the chart. I have been bearish on gold pretty much all year since it topped over $1000/oz. in March. It fell all the way to the $725 level last month and but then spiked higher to $900 in just days after fears of dollar dilution as a result of the bailout plan announcement. Since then gold has consolidated beautifully back to the mid $800s forming a nice bull flag as I have shown in the chart. When the chart offers up a change of trend you got to trade it how you see it no matter what you thought before. Markets change and you must adapt with them.

This is a bullish pattern because the retracement after the initial runup was nothing more than profit taking on low volume. When the flag pattern is broken then the next leg up begins. I believe we could see this flag break anyday and I would be a buyer of gold in the low 900s (or the GLD in the low 90s) with a break of 920 expected shortly. I think gold can get to 960 fairly quickly so this is more of a swing trade. I would keep a stop under the 87 area if I were buying the GLD.

If you want to play it with options (now that they are finally listed for the GLD etf) then I would go with the Nov 90 calls for around $5.00.

Thursday, October 9, 2008

Free Fallin'


The selling continues and we are really seeing some really ugly levels on the indexes now. Yeah the brains on CNBC will tell you the Dow closed at 8279 but what really matters is the SPX. This broadest measure of the market closed today at 909. We are now down about 40% from the highs and getting dangerously close to retracing ALL of the gains from the prior bull market of 2002-07.

We have pretty much blown through all sorts of support like a hot knife through butter. Looking all the way back to the end of 2002 and early 03, I see some support at 900, 880, 875, and 850. Below that and we have serious problems. I dont think we will see those levels but we could see the high 800s Friday.

I fully expect us to gap down Friday as the futures are already at 895 as I type after a low of 881 when Asia opened down gi-normously. As of this posting all Asian markets are down between 4%-9% with Japan taking it on the chin at 9%.

This week it has been strictly a scalping market and I will be looking do just that again Friday. But honestly if you arent experienced and dont have to trade, then don't. This is the most volatility I think we will see for a very long time. The VIX topped at 64.92 today! Implied volatility in the options market is simply off the charts. We are setting up for a huge snapback rally in the next few days but I fear it wont be Friday. Looking back in history there are almost no occasions where a market bottom comes on a Friday.

Cramer Capitulation




Monday Jim Cramer came out on The Today Show to tell everybody to sell stocks NOW if they need the money in the next 5 years. Lol, ok where to start...first off Jim is now one of my favorite contrarian indicators out there. Love the guy for his passion, and he did get me into this market when I first started out but damn how bad can your timing get. Second, we are down 35% from the all time highs one year ago and NOW Cramer tells folks to sell...lol you cant make this stuff up. Don Harrold sums it up nicely in the above video.

Cramer throwing in the towel down here at DOW 9500 might just be the greatest buy signal of all. What bugs me is that he loved the market all year and kept people thinking that with every rate cut we get the better off we are. Which is not the case. He kept people in the nat gas and commodity plays wayyy too long and when a poor Cramerican called his show and asked what to do about their losing positions he said buy more on the way down (always a losing strategy after a bubble pops).

So the majority of his sheep rode losers into the ground and NOW he tells them to sell if they cant take the pain? Come on Jimbo...

Wednesday, October 8, 2008

Hank "Sell Signal" Paulsen?


Ok so I'm not gonna go into how wild of a day it was today because unless youve been living in barn lately, then you already know this. What I will touch on is how Hank Paulsen may be the newest signal to sell when he comes on tv to "restore confidence". In the chart you can see that at about 3:15 et Hank comes on and starts speaking. This is precisely the time when the market makes a double top high at 1020 (which is coincidently the pivot point for the SPX cash today) and precedes to sell off into the close and end at 988. I remember when that was a huge move in a week, lol and now we get these moves in the matter of one hour. Unreal.

Infact, looking at the chart you can see the range of the SPX was a full 50 pts..but the roundtrip that it took was much more. The trading opportunities were real today and I was quite active in my trading intraday. I wanted to go over a few of the patterns on the 5min chart today that proved to be low risk setups. First the descending triangle that appeared to be setting the stage for a massive breakdown under 975 during the first half of the day...actually proved to be a falling wedge as you can see from the outline I drew in. Falling wedges are bullish reversal patterns and this one was no different. At exactly 1pm et the SPX broke out to the upside of this falling wedge and preceded to run up 40 points in literally 90 minutes. I took some QQQQ Oct 34 calls on this breakout and rode them up for 25% in a hour and a half. I could have just as easily taken a long in the ES futures but I chickened out.

The second formation that came to fruition today was the double top sell signal off the test of 1020...indicated by the two circles on the chart. When a market fails to make a new high and resumes lower it is a sign of buyers drying up and a likely rollover of prices to come. We then dropped off a cliff to close the day.
The setups are there everyday people, you just need to learn how to read them on the charts using proper technical analysis and money management. Meaning that once you are in a trade you monitor its odds of success and move up your stops accordingly to lock in profits, without the influence of emotion.
So to review, just remember to sell as soon as Hank, Big Ben, or Bush begin a speech on the markets/economy, lol

Tuesday, October 7, 2008

Market Tops and Bottoms


The mechanics of the markets are based so much on psychology. Its a fact that the public buys at the top and sells at the bottom. This phenomenon can be traced back even to the Dutch Tulip bubble of the 1600s and has been repeated in the same behavioral pattern in every major market top and bottom of the past century.

The chart to the left displays an easy to understand spectrum of emotion in most all market cycles. As you take a look you can probably even admit that you have felt these emotions when you first started out trading in the markets, I know I did. Or if you have never traded then I'm sure you can correlate an event from your life into the visual you see here. Whether its that first time you took a risk with a new career venture or a serious relationship you had when you were young, you can probably see that most things in life can be emotional at nearly every stage.

So at the risk of sounding like a psychologist, or even worse, a philosopher; I will always stress that you must keep your emotions in check. This is especially important when trading in the markets. A famous quote from Warren Buffet states, "Be fearful when others are greedy, and be greedy when others are fearful".

So when everyone and their uncle is piling into some specific asset like there is no tomorrow then you either want to be selling it to them or just sitting on the sidelines. For example, oil anyone? In July 08 oil topped at $147/barrel and that was pure euphoria reminiscent to the dot-com bubble in 2000. The chart of oil went parabolic during the bubble. People thought oil and all commodities were going to the moon. 3 months later oil hit $65 . You do the math. The same can be said for being greedy when others are fearful. When the fear is so thick you can cut it with a knife and the markets are in full panic mode you want to be on the opposite side of this emotion. Capitulation happens when the weak hands just throw in the towel at whatever price they can get because the pain, both financial and emotional, is simply too great. Usually markets will overshoot the upside and the downside so be prepared for the market to surpass where you "thought" it was going as it surprises the masses once more.

If you can get a grasp on the market psychology of the crowd and do the opposite of what the crowd is doing then you will be in a much more favorable position to make money in the markets. The crowd is right during the trend but WRONG at both ends. This is true in any timeframe and can be applied to most anything that has a cycle. I have learned that being a contrarian in the markets can pay off very handsomely because stocks are like rubber bands or springs that can only stretch so far. Once supply and demand has been stretched in either direction, it usually comes back to a sense of normalcy due to the concept of mean reversion.

Its almost impossible to time the exact top or bottom in a market but thats why I let the charts tell me when the trend is done and a reversal is for real. Measuring market sentiment is just as important as technical or fundamental analysis. There are numerous indicators out there that measure this sentiment (VIX, put/call ratios, volume spikes, extreme newspaper headlines, investors surveys, mutual fund inflows/outflows, etc.). But more often than not you will see it in the extremity of the crowd's raw emotion when they are involved in tops and bottoms.

Hopefully after reading this, you will have a better idea of market psychology and not get caught on the wrong side of the trade. :)

Pure Liquidation


Today was as textbook as it comes. It was steady in the early going only to break down under 1060 on the SPX just about the time Bernanke started speaking. Bush came out and delivered an encore of NOT restoring confidence, and then the market tanked even further after midday.


As you can see from the 5min intraday chart it was a great opportunity to sell the futures on every lower high that was met with resistance and downtrending 20 and 50 moving averages. These patterns are bear flags and are high probability setups to enter trades in any market, or stock. We had numerous bear flags on the index today and each one resulted in a breakdown and wicked selling into the close. If you can time this sort of pattern with an indicator as reliable as the stochastics as shown at the bottom of the chart, you will have great risk/reward trade time and time again. And the name of the game is to always find the best reward for the least risk. The trend is your friend and until a trend reverses you have no business trying to go against it. Your probability of success in trading will rise drastically if you trade in the direction of the trend.

So have we bottomed? I dont know but I will try to focus on that topic in my next post. All I do know is that it is way to late to go short on anything and a bit too early to go long. So watch and wait. Develop your patience and discipline. Scaling into positions might be a good idea the next day or two because I think we are very close to a big snapback rally. This is definitely a daytraders market.

Monday, October 6, 2008

You Can Taste The Fear



After being down 800 Dow points, the market reversed and shot higher regaining over 450 points in the last hour. The selling was as fierce as I've ever seen and it seemed like we started to capitulate an hour into the day. Except for one crucial factor. Volume. The volume was lacking what a capitulatory event requires. Even with decliners outpacing advancers by over a 12-1 ratio and the VIX hitting all-time record highs of 56 today, I think we need more volume for a long term bottom to be established. Today was a good start but I would have preferred to see a total washout selloff into the close, then a follow up gap down tomorrow with a midday reversal and close in the green. We will bottom, its coming, but just dont try to be a hero and plant the flag before the battle has been won. My rule is to let the other guys grab the first 20% of a move and the last 20% of a move. I'll be happy taking that middle 60% every single time.




If you take this same approach you will have a much better risk/reward when trading the markets. A wise trader once said that if you try to pick a bottom, you'll get stuck holding a handful of something, lol.




Getting back to the VIX, I mentioned it got up to a 56 handle, then closed at 52. If the reversal at the end of the day were to be real, I would have wanted to see that measure of fear to drop off a cliff during the market rally. It did not. We may be bottoming this week but I dont think it finished today.

Sunday, October 5, 2008

This Week's Trade


The chart pictured is a weekly chart of the SPX and as you can see from the peak just about 1 year ago we are down a considerable amount. 28% to be exact. The long term trend is obviously still down and we should not be so quick to call bottoms like so many pundits have lately. Sure there are always these short term bottoms that produce viscious snapback rallies, and yes you can make money that way but you must know when to take profits. Even short term traders like myself need to always start their analysis from the longer term timeframes so you are aware of the longer term trend. We are getting to an extremely oversold point on the markets and odds say we get some sort of rally here soon but we will have to see a massive washout capitulation moment first.
Last week the SPX lost about 9% and this is truly one of the widest ranges for a week I have seen. Starting the week over 1200 and ending it at 1099 is mind-boggling but this is the market we are in and thus you must trade what the market gives you and not what you want.
With the futures down about another 15 SPX points as I type Sunday evening I would expect us to gap down in the morning and perhaps sell off further but not without at least an attempt of a gap fill after the open. I have had a bearish bias on my options positions the past few weeks but I will be looking to stay on the sidelines looking to find some longs and have my cash ready when this market is ready for a relief rally of some sort the next week or two. Again, not saying this will happen but I am going to start to build a more bullish bias this week. With that said, for Monday I will more than likely have a bias to the short side when trading the ES futures. Lots of resistance overhead (1110, 1115, 1125, 1130, 1137-1140, 1154).
I have a feeling this will be another volatile news-driven week. With the bailout plan passed and out of the way, you will probably see rumors of the Fed coming out with a rate cut to ease the pain OR the Fed coordinating a global rate cut effort with other central banks.
Whatever happens out there, dont get caught on the wrong side of the trade!

Welcome to The Trading Pit

This will be a place where I provide daily market commentary and potential trade ideas. I hope to throw in some educational pieces every now and then so you the reader can learn along the way if you are interested in the topic at hand. I plan on providing unbiased objective market data and interpretation based on my experience of following and trading the financial markets the last several years.

I am primarily a short term trader focusing on swing trading stocks and options, as well as day trading the futures. I have a passion for learning about the markets and love to encourage people to get involved in the trading/investing game, because in my opinion its the greatest game on earth. Through this site, I plan on putting all my market thoughts and actions that I share with friends and family into one convenient online location so everyone can come together to one place and view my latest posts day or night.

Who knows, maybe you can even learn something along the way :)