Wednesday, July 29, 2009

Markets Flagging Out

The SPX has retraced a bit of the previous two weeks of gains so far this week and I think you can probably see a bit more profit taking into the weekend. We are forming a nice little bullish flag on the 60min chart that should consolidate down into the 96 area on the SPY. This is a significant level of support because it was prior resistance before we broke out above it last week. Prior resistance will always become support and when you see resistance broken out of...then you get a retracement back to that pivot area which is followed by a continuation rally higher.

Crude got pummelled off a very strong dollar and bearish inventory report. Gold and copper are selling off as well. The currencies are what you should watch for your first sign of the stock market going higher. The dollar has had a couple of very strong up days here and is due for a slight pullback so if it does then you can possibly see the SPX get a bump in the morning Thursday.

Sunday, July 26, 2009

Weekly Watchlist 7/27

This market continues to shred the shorts to pieces and even perplex some bulls out there who didn't quite see the degree of explosion being as large as what we have seen these last 2 weeks. In that short time the SPX has surged higher over 100 handles and made new highs not seen since last November. You have to be bullish at the way the market is shrugging off bad news lately and with so many still stuck short and "not believing" the rally there is plenty more fuel for the fire. As long as traders do not believe in this move, it will continue.

I keep hearing so many people saying the market is overbought and this is a fake rally. Um no. Lol, meanwhile the losses in their account are very real.

Markets can stay irrational longer than you can stay solvent, so admit you are wrong when the market tells you.

I believe we still have plenty of room to the upside in this current leg of buying. Infact, I think last week confirmed that we are headed straight to Dow 10k in the next two months. I see the SPX getting to about 1065 in that time period. That is the 61.8% retracement on the SPX from the peak of last August right before all hell broke loose; and I think it's an appropriate target for now. We are just about to the 50% retrace line so while we could consolidate a bit here I think the internals and breadth are too strong to not see more upside coming here.

Another thing to watch is the monthly chart and how July closes out this week with 5 days to go. We are very close to the 12 month ema and if July closes above that mark then it would be a very bullish major buy signal in the long term for me as this has proven to be a very reliable indicator the last several decades.

The watchlist:

Shorts>>> BA, NOC

Wednesday, July 22, 2009

All About The Dollar

The SPX is bumping up against resistance here this week in the 950s at the same time the dollar is teetering on major support here around 78 on the dollar index and Euro hitting 1.425. This is not a coincidence as the US dollar is a great signal to confirm a move in the stock market. Stocks bottomed in March the same day the dollar topped. It is a handy relationship that will remain true as long as the dollar is treated as a "safe haven" and stocks in the US are denominated in dollars.

So what's next? Well we are def on the brink of a big move in either direction. It's just tricky to know where. Stocks have run really fast in the last week straight into resistance at the same time as the dollar index fell from 81 to 78. It seems like risk appetite is back on the table for the time being. I do think the Euro and cross rates like the EUR/JPY want to go higher into the next several months. The Euro is much more bullish than Euro/Yen overall so it should be interesting to see if they diverge much more. If the Euro breaks 1.43 I think you can easily see it get to 1.46 quickly.

Looking at the SPX I didn't really like the end of day selloff but you gotta still have a long bias until we lose 940. I tend to think we could trade lower in the next week however. We have that big gap below us down at 906 from last week. It is waiting to be filled. And gaps on the SPX almost always get filled so keep that in mind.

Sunday, July 19, 2009

Weekly Watchlist 7/20

After last week's impressive rally we can pretty much come into this week with an upside bias. However, at the same time, you must remember that 700 Dow points in one week is quite a run. The market is definitely due for a breather this week, whether that means just a sideways consolidation or perhaps a shallow retracement. It is also the first week of a 5-week August options cycle meaning that unlike most months where there are 4 weeks between each options expy week; this month we have 5 weeks. This usually results in some downside pressure during the first week of the cycle as buyers come in for put protection and market makers (who sell the puts) must short futures or common to hedge themselves.

Technically, the SPX is still stuck in the 875-950 range that has been in control since early May. Summertime is known for being fairly rangebound as markets are quieter (except last summer of course). I actually think the SPX can continue to gyrate within this range until Labor Day, which is about 6 weeks away. Of course anything can happen but if the market can stay in the current range for the last 2 months, what's another 6 weeks?

Like I said, short term I would expect a pullback and even would not be surprised to see that gap from last week filled soon. Another thing I noticed is that last week's candlestick, as pictured in the chart above, regained all of the previous 4 weeks of losses and brought the SPX back to 940. That is bull market price action. Time is just as important as price when it comes to technical analysis. Also, the retracement from June came down and bounced almost exactly off the uptrending 20 week sma and then closed just above the 50 week sma.

The watchlist:


Wednesday, July 15, 2009

Bulls-Eye

Well talk about your short squeeze setup into options expiration. So far this week the market has ripped higher and today gapped higher and did the stairway to heaven dance all day after positive INTC earnings. The bulls were charging thru the streets squeezing all the shorts who were "certain" the head and shoulders of the past month would break down and cause a violent selloff.

I began to become suspect of the validity of the head and shoulders on Sunday as I researched for this week's watchlist. The fact that mass media (CNBC and company) had been talking bout this bearish chart pattern for days on end told me that if we get any kind of spark, it could result in a violent short squeeze higher as all those bears who initiated short positions last week on the brief break under 876 would be forced to cover. In addition, options expy week adds some fuel to the fire as option shorts are squeezed and must chase stock to hedge their short options, thus bidding up the market. Throw in a packed week of earnings and you got one big whipsaw squeeze effect.

Sometimes when a chart pattern looks so perfect that you think it just can't be wrong, it can be a great contrarian signal if that sentiment leading into the pattern formation gets too overextended in one direction. That's what happened.

So what happens the rest of the week? Tough call really. I would think we consolidate lower and drift. Would not be surprised to see the gap filled by Friday either. However, if the market closes above 930 for the week, then you gotta adjust your bias to the bullish side once again and say that 870 swing low from last week will stand.

I am keeping it light and waiting to see how the week finishes up and then re-evaluate going into next week.

Tuesday, July 14, 2009

INTC Covered Calls

Intel (INTC) is reporting earnings after the bell today and I thought it would be a great example of how to use options into earnings to hedge an already established stock position. Assuming you are already long INTC stock and are in a profit but do not want to sell just yet because you see more upside but want to hedge your bets into "the number" you can sell some covered calls.

INTC has been trading in a fairly tight range between 15-17 the last several months and with the stock trading 16.68 currently you could sell 1 July 17 call for every 100 shares you own. Right now you can sell them for 25 cents each.

So if you own 1000 shares of INTC, sell 10 of these calls and collect $250 for an option that expires in 3 days. If the stock stays under 17 by Friday you keep the 25 cents and you can then go ahead and sell the August 17 or 18 call to collect more premium for the next month, sort of like being the landlord and collecting "rent" each month for a stock position you were going to hold anyway.
If the stock blows thru 17 by Friday you get called away from your stock and are obligated to sell your shares at 17 AND keep your credit of 25 cents you collected when you sold the calls short. Not a bad deal if you ask me.

The implied volatility in July options for INTC is up around 70% while August IV is much lower at 40%. This tells you the front month options are juiced up with plenty of premium to sell.

This is a great way to hedge your long position going into any catalyst, or to just increase your returns by using options.

Monday, July 13, 2009

GS 1-3-2 Put Butterfly

Goldman Sachs (GS) is reporting earnings on Tuesday before the bell and it is widely expected to be a blowout report with huge profits. GS is without a doubt the best of breed in the financial sector and I never really like to bet against the best. However, in this case with everyone bullish I am looking to take a contrarian view into earnings.

GS implied volatility is up around 50% which is low compared to the past year but is an uptick from the last few weeks. GS has moved more than 11% on each of the last 3 earnings reports but the option marts are pricing in a smaller move this time around simply because the panic is gone.

I want to play the downside in GS with options but I don't want to just go out and buy puts straight up. I'm cheap so I want to finance any option purchase with an option sale. The put strike with the heaviest open interest is the 135 put so expiration could act as a magnet down to that area.

I am buying a 1-3-2 downside put butterfly using the 140/125/120 July put strikes.

Buy 1 GS 140 put
Sell 3 GS 125 puts
Buy 2 GS 120 puts

Net debit = 1.50 per butterfly

Confused? Don't be. This option trade as shown in the risk graph above gives you a fantastic risk/reward if GS were to trade lower into expiration day.

Max risk is the initial 1.50 you pay. This trade will lose that amount if by Friday GS is above 140. Breakeven at expiration in four days is 138.50. So GS needs to be below that mark for this trade to start making money.

Best case scenario is if GS trades 125 on Friday and this trade will be worth 13 bucks. Or roughly a 750% gain in a few days. Not too shabby eh? Infact this trade makes money anywhere below 138.50.

Of course the probability of GS being at 125 is slim, but if you think, like I do, that at least a 130 handle is possible by Friday then this is a great way to get into a cheap downside option play. This is a trade you should do with a small amount of capital because the odds are low but the potential payout is huge.

Sunday, July 12, 2009

Weekly Watchlist 7/13

Going into option expiration week the SPX finds itself at 879 which is the exact site of its 200 day moving avg. The neckline of the head and shoulders pattern is also just underneath this level and if the SPX closed under 870 then I would consider it very bearish.

I still think this market is eventually going to 850 at a minimum and potentially a bit lower. But for this week at least initially I would expect to see a weak bounce back into the 890s and perhaps even into the 900 resistance level. Everyone is expecting this head and shoulders to breakdown as a sure thing. I get a bit nervous when I hear everyone predicting the same thing; and being so confident about it. It would not at all surprise me to see the market throw everyone a curveball and trade up for a few days and make another lower high before then finally dropping and breaking down.

Lots of earnings coming out this week so it could be a wild one. Overall I would still have a bearish bias going forward but the market is oversold and I would expect to see the unexpected this week and perhaps be ready for the market to have a weak bounce off this level. After all, the market will move and take as few people on the ride to profits as it can.

The watchlist:

Longs>>> CTB, AES, CPA, MVIS, PPD

Shorts>>> COH, ANR, GNK, DE, DD, MLM, FTO, IEX

Friday, July 10, 2009

JNJ Long Calls

Johnson and Johnson (JNJ) has been grinding up the last several months and during the recent market pullback has not shown much weakness. In fact, it's in a tight consolidation near 6 month highs and I think it has a nice shot of breaking out of this tight range and head higher. The 20 and 50 day moving avg's are close to crossing over the 200 day.

The one wildcard is earnings being released next Tuesday morning. JNJ is not a big mover and actually has pretty low implied volatility in the 20s. It usually does not move much off earnings and so the options market does not price in a move. This means you can get a relatively good deal buying options straight up.
You could either get in long here or wait for the breakout above 57.25.

Buy the August 55 calls for $2.60 or better. I would be cutting losses on this trade if JNJ got below 55 as this is a very strong support level. My target on this trade is the 59-60 level.

I like this trade as a defensive long position in an overall market that is fading lower.

Thursday, July 9, 2009

MS Long Puts

Morgan Stanley (MS) has formed a bearish slanted head and shoulders pattern on the daily chart the last few months or so with a neckline around 27ish. The stock broke down out of that level this week and today retraced yesterday's down move on very low pathetic volume. The 20 day MA is crossing below the 50 day MA and there is little support in MS until the low 20s. Coincidentally, the measured move off the H&S pattern has a target of 20; which was the low in April as well.

With the stock trading just under 26 I would buy the August 26 puts for $2.25 here. I think you could get a quick move down in this name especially if the broader market continues lower towards 850 during July, as I tend to think will happen.

I would cut losses quick if MS got above 27.50 as that would be above that neckline which is now resistance. On the downside I am targeting 21 as that is the 200 day ma and should provide some support.

You could also look at selling a call spread at perhaps the 28/30 line if you want to take less risk, however I like the put play since it could be a quick sell and the broad market is feeling heavy here as well.

Monday, July 6, 2009

Weekly Watchlist 7/6

Going into the third quarter all eyes are on the potential head and shoulders top forming in the SPX. With the neckline near that pivotal 880 mark we should see whether or not it holds this week. If that level cracks then I think you can count on 850 coming and potentially lower in the coming months. However, there is still some underlying strength in the market so we can easily just consolidate further into July as well.

With the energy sector now joining the roll over and sell party it seems like we are headed lower in the short term. At the same time crude is selling off we have the dollar starting to bounce and that could continue for a few weeks at least, which would put pressure on stocks further.

Overall I would be tilted to the bearish side until this pullback completes or something changes. There is simply very little reason to be going long stocks at this time. But as always, there is usually a good long or two ready for a move and breakout.

The watchlist:

Longs: CVD, IM, VPRT, WLT, JAH

Shorts: X, TOL, CMG, FCX, MAC, PAY