Monday, June 29, 2009

Comparing Today's Dow to 1937-38 Dow

If you look at the Dow Jones from the bear market of 1937-1938 and compare it to our current Dow Jones chart from 2008-present you will see that the similarities in price action are practically mirror images. The chart on the left shows the daily chart of the Dow from 1937-38 and the chart to the right shows the present market. The comparision is striking.
In early fall of 1937 the Dow crashed sharply by about 35% before hitting a temporary panic bottom the second week of October. Last fall 2008, the Dow crashed sharply by 33% before hitting a temporary panic bottom the second week of October. In late fall 1937 the Dow had multiple snapback rallies that eventually rolled over and resulted in new price lows at the end of November. This SAME thing occurred in our current market last November 2008 when the October lows were pierced temporarily before a bounce ensued into Christmas!
Between December and January the 1937 Dow played ping pong up and down for a little while. So did our current Dow during that respective timeframe.

Finally, the 1937-38 bear market rolled over in late February and saw its final low in late March with very similar selling structure that our 2009 March low experienced! Just unreal.

Similarly to our recent explosive 40%+ rally off the March lows, the 1938 bottom also saw similar gains into the summer months when price began to fade and retrace a bit. Still the pattern into the fall of 1938 shows that the Dow exploded even higher and finally drifted mostly sideways into end of year.

So does that mean this is where our current market will follow into the 2nd half of 2009? Who knows, but this is definitely an interesting comparison to watch until the correlation subsides.

So what happened with the Dow in the year or two or five years after 1938? Price sold off in early 1939 but had a recovery later that year. In 1940 the market saw another significant selloff which resulted in downtrending stock prices until the ultimate low was reached in early 1942. Afterwards, a very large bull market finally emerged. So even after that initial peak was reached in late 1937, the Dow did not see new highs again until 1946. Nine years later. In other words, a hell of a long time.

Is that where we are headed? Only time will tell..

Sunday, June 28, 2009

Weekly Watchlist 6/29

Going into the last few days of June and the 2nd quarter we have the SPX sitting at 919 and remains stuck in a range between 890-950. This week there is no trading on Friday to observe 4th of July so I think the action will be quiet with low volume. Still with end of quarter window dressing and the market sitting at key support levels, they might try to push this market up into the holiday weekend.

Overall, I think we need to keep an eye on the potential head and shoulders pattern developing on the SPX the last few months. Even with last week's rally on Thursday it could simply be forming the right shoulder of this topping pattern with a neckline near 880. If that mark is broken we could have a more significant selloff on the horizon. However, for now it is only a potential pattern and if the market wants to rally, then it will.

Since I am anticipating a rather rangebound market for te next week or so I would not be looking for too many big moves out there this week. Selling some credit spreads or condors might work well in the coming weeks as these are strategies that favor sideways markets and volatility usually hits its lowest point during the July expy cycle historically.

The watchlist:


Shorts: CAT, PCL, TOL, WY

Tuesday, June 23, 2009

Long TGT Puts

Target (TGT) is part of the retail sector and from my analysis looks to be one of the weaker sectors out there this week. Many of the names, such as TGT, are showing signs of rolling over and retracing some of their recent gains. The last few days TGT has consolidated in a bear flag formation into resistance near the 40 level. I got into some August 38 puts in TGT on Tuesday for 2.65 after the nice down candle. I am expecting a breakdown of the 38 support level very soon and am targeting a move to 34-35 as an exit level for those puts. My stop is if TGT trades above Tuesday's highs at the 39.75 mark.

Sunday, June 21, 2009

Weekly Watchlist 6/22

Last week the SPX finished at 921 and had its first negative week in a month. I think the coming week could prove to give us a direction that the market may trend with in the coming month. After falling from 950 to 900 recently the SPX bounced back to the 925 area as options expiration controlled the market last week. It feels like the market is a bit heavy here and even in the last month while more and more bulls jumped on the bandwagon of the strong rally, price has really not budged from where it was in early May. It seems to me like sentiment is topping out and perhaps giving a contrarian signal to be cautious of a pullback.

Technically the charts show support at 900 and 880 but below that mark and we could be in for a more dramatic selloff into the lower 800s during the coming months. I'm not saying it will happen but its something to watch for sure. Other markets are usually a great leading indicator to the stock market. On Friday, while the dollar was down sharply, the crude oil market reversed lower quickly to close under 70. The dollar and oil are usually inversely correlated and when the relationship acts differently it tells me we could see a coming reversal in both crude and the dollar. Meaning that crude oil is ready to pullback and with that the energy sector (which has already started pulling back) should put pressure on the broader SPX. Energy has been holding up stocks as of late and without this anchor, I think the SPX could see a bigger retracement.

With that said, the FOMC announcement comes this week and should make things really move in the bond and currency markets. It will be interesting to hear what they say about potential inflation and rate hikes as bond yields have risen plenty since the last FOMC meeting.

Overall, I would be expecting a pullback going into the end of the month but we could also start to see some window-dressing as funds mark up their performance as well. Either way, I would be positioning more delta neutral to negative in my exposure for now.

The watchlist:


Triangles>>> CVC, MGA, CEG

Breakouts>>> HPQ, BAM, TCO

Friday, June 19, 2009

Buy Back Credit Spreads Or Let Expire?

When you sell a credit spread you take in an initial credit by being short a strike and being long a more out of the money strike. Usually I take credit spread trades in the front month or second month expecting for Miss Theta to work her magic as time decay accelerates in the final month of an options life.

With that said there is always a question of whether you should hold your position to expiration realizing the full credit and saving on commissions if the spread goes to 0, or buy back the spread lower after you have gained a significant amount of the possible profit (80% or so of the initial credit).

It definitely varies by circumstances and potential catalysts on deck for the underlying but I would say that it is almost ALWAYS beneficial to cover your spread for gains before expiration if you are just trying to collect the final few nickels or dimes. If you have ever heard the expression, "Picking up nickels in front of a steamroller," then you should know that the holding out for the last dime when other opportunities are a passin' is going to eventually result in a situation like what happened in POT this week.

So what happened? As you can see in the chart Potash (POT) has been a hot stock the last several months. However just this week the company came out with news that pricing power will fall and thus the stock fell out of bed Wednesday morning. After being above 110 the day before, the stock closed that day at around 95 slicing thru its 200 day ema.

In mid May I sold a June 95/90 put spread for $1.65 and the trade worked well right out of the gate (of course in hindsight I should have just bought calls since the rally was huge). I then covered the spread at .20 in early June with still two weeks until expiration thinking that holding out for the last few dimes was greedy. This turned out to be the right move as the collapse in POT this week would have wiped out a majority of my profits.

I am not trying to gloat but simply point out that the next time you ask yourself whether or not you should cover your short credit after a nice gain; just do it. The risk/reward of holding out for the last few pennies is rarely worth the opportunity cost of missing that other mover on your radar screen so take those profits and move them into the next trade.

Thursday, June 18, 2009

RIMM Double Diagonal

Research in Motion (RIMM) earnings are due out after the bell and it is sure to move afterwards. RIMM has moved up or down 11% or more in 7 out of the last 8 earnings reactions. With 3 of those seeing moves greater than 21%. So we know its a mover and a shaker. The implied volatility in June is absolutely screaming lately and today sits around 170% level. To contrast, July IV is way down at 70%. So in this case it would be best to try and sell the juiced up front month premium.

The stock has been on a bullish tear lately until this past week when it retraced from 86 back down to the mid 70s. If I had to guess a direction I would say its probably a buy after this pullback but thats the beauty of options; we don't have to pick a direction if we don't want to.

So what's the trade? I want to use a complex strategy called a double diagonal spread.

Buy the JULY 95 call and JULY 65 put, and sell the JUNE 90 call and JUNE 70 put.

Net debit of $1.34.

Profit zone roughly between RIMM stock at 67-97.

This trade takes advantage of a volatility collapse in June options which will come Friday morning. The June options are very expensive relative to the July's. While the profit zone is wide, the max profit of roughly a triple occurs if RIMM settles Friday at 90. Overall this is a great looking non-directional trade going into a coin flip earnings report. The other thing I will note is that since you have a calendar spread on a diagonal strike basis you can always cover the Junes and hold the one leg of the long July options that the market trades to and manage the position into July.

Whatever you do, this is surely a better trade than simply buying June premium, which is what the amateurs will be doing.

Monday, June 15, 2009

Butterfly Hedge IWM

A great way to hedge some long exposure going into expiration week is to buy a cheap OTM butterfly on a major liquid index. Usually you should expect to lose the entire premium if the trade does not work out because it is simply an insurance policy against your already delta positive portfolio. It reduces the cost of put protection and at the same time increases your potential risk/reward dramatically so you get more bang for your insurance buck.

I am looking at the IWM and the possibility of seeing a further selloff in the markets that COULD take the IWM to 49-50 by Friday's expiration. Butterflies profit most in the last week of expiration as the premium gets sucked out of the middle short strikes. I think if you are needing a hedge for this week the trade is to buy the June IWM put butterfly at 47/49/51 put strikes.

You can open this debit trade for 50 cents or better and the max gain of around 1.50 occurs if IWM is at 49 on Friday. Profit zone is anywhere between 47.50-50.50. So the probability of max gain occurring is rather low but thats how you get a potentially huge risk/reward where you could get a triple. Again this is a hedge trade that you should take only if you do not mind losing the premium paid.

Sunday, June 14, 2009

Weekly Watchlist 6/15

Going into option expiration week the SPX sits at 946 and just above its 200 day ema. It seems like the last two full weeks the market has done nothing but trade between 925-950. While most indicators are overbought and everybody and their brother is calling for a selloff, the market has shown incredible poise. I think we are due for a pullback as well and there are several signals from other markets saying that we will. It seems like the energy sector has been holding the market up as tech pulled back last week. The dollar looks ready to retrace its recent losses against the Euro and the bond market looks to have bottomed in the short term. These are just some of the markets I watch to see what the equities might do next.

With that said the price action on the chart of the SPX still looks bullish and this sideways consolidation may prove to be a coiled spring which is setting us up for the next leg higher. Of course we need to see this confirmed with a close above 950 first. At the same time this is not the kind of market you want to short so the prudent thing to do is get flat and wait for Mr. Market to show you some direction.

With this week being expiration week I think we could get that move we have been waiting for. If we can get a close over 950 then I think we see 989 quickly as a first target. My bias will be cautiously bullish unless we see a dip under the 20 day ema down around 925.

The watchlist:

Triangles>>> MVSN, GE

Flags>>> GAP, GERN, HRB, TAP

Breakouts>>> ANR, DV, CERN, CVC, JEF, K, FWLT

Wednesday, June 10, 2009

Euro Head and Shoulders Reversal

I was looking through my currency charts and noticed a nice little ugly head and shoulders possibly developing in the EUR/USD 60min chart going back the last several weeks. With the Euro trading around 1.403 as of right now it is still forming the right shoulder of this pattern so it is not yet confirmed. The neckline is right at 1.38 even and the previous high last week was a smidge over 1.43 so a measured move could take the Euro to 1.33 or down 500 pips or so IF it breaks down below the 1.38 neckline.

This would almost certainly be bearish for US stocks short term and would drag down the price of commodities as well. Just stalking this trade and not saying it will confirm itself, but it is worth watching.

SPX Cup and Handle?

Looking at the past month or so of action on the 60min SPX chart you can sort of see a decent cup and handle pattern. The formation isn't the most perfect one I've seen but nonetheless the consolidation during the past two weeks has given the chart a nice little "handle" shape with resistance above at roughly 950. The jury is still out whether or not this pup breaks out or not but you gotta be prepared for anything.

I have actually been starting to be more cautious as I think we are nearing an area where we may retrace from. BUT, that is only a hunch, and I don't trade off hunches. Some indicators on the 60min and daily charts are showing negative divergence but as long as this consolidation continues I think it's prudent to respect the possible cup and handle in progress.
If the SPX can finally close ABOVE 950 then I still have a short term target of 989. Really could go either way here but keep an eye on the dollar weakness and EUR/JPY cross to possibly signal what direction the market takes.

HES Bear Put Spread

I want to make the EOG trade I posted yesterday into a pairs trade with another energy sector name. While I am bullish on EOG and other nat gas names I am more bearish on HES.

Hess (HES) is more tied to crude oil and the chart is in a large sideways channel but towards the top of its range. I think the stock could retest the low 50s in the coming month as it is forming a weak bear flag after that large down candle from last week with big volume. I think the trade here is to buy a HES July 60/55 put spread for $2.10 or better.

Max loss on this trade is the initial debit you pay and max gain is $2.90 if HES is below 55 at July expy. So roughly a 150% max return is possible.

Breakeven at July expy on this put vertical is if HES is at 57.90.

Tuesday, June 9, 2009

EOG Bull Call Spread

Eog Resources (EOG) is a natural gas company that has been making a series of higher highs and higher lows in recent months even as nat gas itself has languished. EOG has been wrestling with its 200 day ema as of late and I think it's safe to say the trend is higher as long as it holds the 70 area. With nat gas showing signs of basing lately I think the play here is to buy a July 75/80 call spread for $2 or better.

Max loss on this trade is the initial debit of $2 you pay and the max gain is $3 if EOG is above 80 at July expy. Of course you can always take profits before then as well.

Breakeven on this trade occurs if EOG is at 77 on July expy.

Sunday, June 7, 2009

Weekly Watchlist 6/8

Going into this week the market is still battling up here near the January highs at 940 on the SPX. It's all about the 200 day moving average from here. The 200 day ema is 943 and I would like to see a weekly close above that area to get more delta positive. The market seemed a bit jittery the past few trading days so I want to check out the long term monthly chart this week of the SPX.

As you can see the huge rally we have seen has not even gotten us back to the 20 month moving average. Nor has it touched the 200 month ema. That level is 1001 on the SPX and it seems as if between 1000-1200 will be formidable resistance if we can even get up to challenge it in the coming months and years. This is one reason why I think the long term picture (1-3 years) could be more of a sideways pattern that produces an excellent trading market rather than a full blown uptrend. The point I want to make is that the past two years have damaged the long term charts and it takes several years for damage like this to correct itself. Time will be needed more than any government programs or "hope".

Looking at the shorter term I still think its going to come down to this 950 area just above the 200 day ema. If we can eclipse it, then we should see the 980s quickly and possibly 1000 being tagged just for the hell of it. That's when I think we might pull back and consolidate into the summer. It might happen, it might not happen. But that's what I would be preparing for just in case.

The watchlist:

Triangles and Pennants>>> ABT, ADS, ABAT


Breakouts>>> ADBE, ISRG, KCI

Thursday, June 4, 2009

Bulls Emerge

Thursday the markets bounced back and retraced more than half the losses since Tuesday. We closed up at 8750 on the Dow and 942 on the SPX. This market wants to go higher. It is telling you that after every pullback that only lasts a few days at most. I was sort of thinking we could come back to test the 915 area before we resume the rally but we raced higher all day and Friday now sets up as another potential short squeeze into the weekend if the jobs report comes in better than expected. I would not be surprised to see the SPX up over 950 or higher Friday.

It will be interesting to see if oil can break 70 and if the dollar sells further into the weekend. Oil looks very toppy up here imo. Tech and banks also hold the key to this market jumping higher and the banks especially on Thursday were strong. If these sectors continue to rally then this market will see 9000 on the Dow soon. For Friday the pivot on the ES futures is 937 and that should be the line in the sand to determine who goes home happy; the bears or the bulls. Below that mark and we could give back all of Thursday's gains quickly.

Wednesday, June 3, 2009

USD/JPY Triangle

I wanted to mix things up a bit and include some stuff for the forex traders out there. I follow the currencies daily but don't trade them, at least for now. Anywho, noticed the Japanese Yen is ready to bust out of a nice triangle on the 60min chart. As you can see on the chart price has been contracting the past week in a series of higher lows and lower highs. It is near the apex of this triangle tonight and the RSI and MACD confirm this as they too have formed triangles of there own. The Yen is sitting around 96 currently and above the pivot point. I kinda favor the upside breakout here but it really could go either way. One thing for sure is that coiled spring is ready to move. I think when the move comes it could be good for at least 200 pips as a swing trade. Trade safe.

Tuesday, June 2, 2009

Testy Tuesday

Tuesday the SPX tested and closed above the 200 day ema for the first time since May 2008. Pretty impressive action and tide the keeps rising higher. So how long will it last? I think we could see either one of two scenarios in the coming weeks. One, the SPX blows right thru the 200 day and charges up to 989 or thereabout. Or two, the market retraces off this 200 day ema and comes back to the 910 area where the 20 day ema roughly would be and then we rally after bouncing from that support. Either way I remain bullish and think we should get to the 980s at a minimum this month. But after 4 straight green days a pullback might be healthy.

For Wednesday I would be watching that intraday pivot on the ES futures at 942.75 and if price fails to stay above that then I would expect a bit of a pullback or consolidation. Above that and the market is free to run imo. If oil and energy start to fade that could dampen any extended rally as that sector has been a hgue part of the recent run up. Trade safe.