Fed up

I suppose it's inevitable. The Fed was bound to stick their nose in the market and mess things up cuz it's been so long since they've done anything. They wouldn't want us to start thinking that they aren't really doing anything so they HAD to do SOMETHING. My general feeling is that they are stuck between a rock and a hard place. If they sit back and do nothing everyone will blame them for sitting idly by while the market fell in on itself. Of course, they have to know that when lowering the discount rate doesn't stop this "credit crisis" (the headline CNBC has been blaring across the screen everyday for the last 3 weeks), they will be blamed for either not reacting soon enough or for doing the wrong thing. Bernanke has the worst job ever. Plain and simple. It will be interesting to see if they will step forward in the next few weeks and lower the fed funds rate or not. I really think Bernanke wants to raise this rate, has wanted to for months, but knows he can't do that right now.

So looking at this pull back I have to ask myself a couple questions. First off, is this just a pull back similar to others we've seen in the last 18 months? Or, is this a major correction that will bring us all the way down to our long term support lines? Let's go to the charts.

Here is the S&P 500. A very concerning aspect of this chart should be the fact that it has retraced 100% from the lows in March (granted this was just intra-day movement, but still, that's a major correction. None of the recent pull backs have retraced so far.


Looking at the trading on Thursday I can't help but think that someone got word about what the Fed was planning on doing Friday. The movement this week certainly established a down trend that will probably continue despite the support the Fed's actions created - messing up my bearish set ups!

The Dow hasn't retraced as much as the S&P and I've already discussed the weakness I see there. This week completed the broadening formation and the support line is holding as resistance, for now. I'm going to put an Elliott wave count on the chart below just for kicks and giggles. I'm no Elliottician but it looks pretty clear to me.


If you put some Fibonacci's on waves 1 and 3 you'll see that 3 barely surpassed its expected move and 5 hit exactly where it should have, almost to the dollar. Cool stuff. But hey, it's all just a random walk anyway, right?

I think the most interesting part of the current pull back is what bonds are doing. This pull back is either a HUGE overreaction or it's more significant than those others we've seen recently. The chart below is an index tracking the interest rate of the 90 day T-bill which should follow stock prices. I've highlighted in blue the "not-a-correction" it did during the summer of '06 and in green the reaction post Feb 27th of this year - which trended opposite the broad market. The recent movement can't even be compared to those times. In fact it really hasn't moved this fast since the strong movement that start back in the fall of '05.


So what does this all mean? Well, I think it means that the bear market will continue for a little while. I think the Fed's actions won't stop the down slide, just slow it up a bit. I think it's going to create a bunch of bear flags on the short term to say the very least. It confirms what I said on July 27th.

I got stopped out of my spread on PCU and my trend trade call on GNK this week. My watch list for next week includes ICE, AZO, MA, and CEG.

PS - I have made a new rule. No more splitting the bid/ask on my option trades. Many times I've given up a buck trying to squeeze out an extra nickel or dime. On Weds this hurt me when I tried to enter an OTM put on the head and shoulders break out on ICE. I split the bid/ask and didn't get filled. I would have been up almost 400% on Thursday and even though it closed near the Weds low on Friday I would still be up 70% in the trade due to the increase in implied volatility. For that reason my trades are going in at the quoted price, I'm just sick of missing good trades cuz I had to pick the change up off the floor. TOS is now allowing the conditional orders fill at a limit at the bid/ask - hooray for those geniuses there!

Confirmation

On Tuesday the Dow closed below the support on the broadening formation and yesterday it closed lower than that on a sharp sell off at the end of the day. That is one of the outcomes we were expecting. But what really catches my attention is that neither the S&P 500 or the Nasdaq held support, which was giving us some potential for some neutrality on the market. So my posture right now is easy.

Broadening

Well, I have definitely been slacking on my posting duties out here in Chicago. But my wife was in town this week, can you blame me?

Before I continue, let me say that if you are ever in Chicago and want to visit the CBOE, don't just show up and expect a tour. They don't do that.

Now to the markets. How schizophrenic can they be?!?! I don't have many positions on. I keep getting in and then kicked right back out. The volatility is crazy, makes me want to day trade. The volatility in the market is making option premiums high creating some good spread opportunities even with expiration coming up in 4 days. But be warned, implied volatility is always high for a reason so monitor any short positions closely and hold on tight.

Last week I got into a credit spread on PCU. I picked up a $1.50 for 10 days w/ a 60% of expiring worthless. Pretty good in my book. It's hanging out right by the short strike but with the overall market at a potential support level I'm expecting it to expire worthless.


I've also got a trend trade going on GNK. It's doing ok, hasn't hit my initial stop yet but I haven't been able to move the stop up yet.


Now for a broad market analysis. I mentioned a couple weeks ago that I was thinking this recent correction could be a significant one. Well, looking at the Dow right now, which has held up a little stronger than the S&P 500 up to this point. However, recently it appears to be forming a somewhat rare pattern called a broadening formation. These can be strong indication of a top if completed. This is how I have it drawn in.


So while the market appears to be at support, and prices may rally from this point, I think it's an excellent time to sell, rather than enter lots of long positions. This pattern will complete with a break of the support line, so be looking out for that.

As far as potential trades, ILMN is looking good for the upside and AZO is still looking good for a bearish trade. Timing an entry w/ AZO has been difficult but I'd like to see it test 122 or so for resistance. My target w/ it is still 100.

Activity

Sorry for the hiatus last week but in all honesty I have been just as active in this blog recently as I've been in the market. I gave up some of my gains and just plain got stopped out of others. I'm currently only in a couple positions, one of which I can't sell no matter how much I want to be rid of it.

I am looking at TBSI. This is a stock that has caught my attention over the last several months and finally put on my watch list. Earnings is on Weds, so I'm keeping a close eye on it until then. It doesn't have much of a history of gapping at earnings so my expectation is that it will continue on its merry way, hopefully giving a good entry.


I have recently been debating my order entry rules on my bounce trades. It's a constant battle of waiting until the close of the day being above the high of the low, giving a good solid, sure entry and trying to not miss on the momentum often accompanying such a move the first day of the bounce. The latter has gotten me in trades that I shouldn't have taken, ones that pull back right after I get in. The new rule is as follows: not wanting to miss the momentum I'm still going to be using buy stops 20 cents above the previous day's high, to make sure I don't miss out on any momentum. However, I will check back w/ the trade before the close. If the price isn't going to close above the high I will close out w/ a small loss. I find that every time this has happened I have been stopped out, so I will just be closing it a little sooner if need be. I think this will be particularly useful in the volatile market we are seeing. Other exit rules are remaining the same.

PS - Check out the Staples today!

Not much of a day

As I type today's post I am sitting in the park on a beautiful, sunny day. There is a little breeze and it's 80 degrees out. Wonderful! But the glare is making it hard to see my screen.

Not a lot really happened today until the end of the day. It was a pretty good sized sell off going into the close. CROX came out with earnings and while it gapped up it closed well off of its highs. Maybe some of the uber bullishness is subsiding. Looking thru my watch list today I realized that I have a lot of work to do. Here are a couple promising charts going into next week. I'm pretty much looking for a close above today's high for entries.

We'll have to see how the market acts to this support here but I might be waning on my bullishness. When I turned on the TV to give my son his daily dose of Cars, there was a commentator on Good Morning America saying "Yesterday's pull back isn't a lot to worry about and the market should continue on it's way just like it has the last couple times this year. The important thing to remember is that we're still up 20% from last year." It just felt like the mentality of the late 90's, a nice sign of bearish things to come. In truth, I can reasonably see the Dow pulling back to the mid 12k's for the long term bullish trend. That could be a nice bear market on the way down there. (I also can't help but think that this looks like a pretty clear end to wave five, referring to the S&P chart I posted yesterday.)

I'm heading to Chicago this weekend so the next post will be from there. Have a good weekend.

Dropping

THE SKY IS FALLING! THE SKY IS FALLING!!!

What a day! At one point the Dow was down more than 400. In fact, I called the absolute bottom, told everyone in the class to buy calls on the Diamonds, of course I didn't have the guts to pull the trigger and I don't think anyone there did either. Oh well.

Needless to say my buy stops didn't fill this morning. I love using them because they keep me out of days like today but get me in on the momentum up.

Believe it or not, I'm still overall bullish. I think it'll take a couple weeks to shake everything out but check out this 2 year chart of the S&P 500.


Towards the end of the day I realized that it was coming back and testing this trendline. It just happens to be the lows of the two corrections we've seen over the last year. 3 touches will make this a confirmed trendline. This was happening as the VIX hit 2 year high levels.


Many stocks retraced back to some good support levels, maintaining their trends. This is keeping me bullish on the market. I say it looks quite toppy, and I'm not sure how much longer the stock market will ignore the economic conditions we are in. But I've always said it's more important to trade what you see rather than what you think or feel.

As for my positions today, I got stopped out of a few and gave up most of my profit on the others. Earnings on POT and COL were disappointing at best. COL got really exciting for the first hour or so. The options weren't trading at first, not surprising when it went from 71 to 61 and back to 71 in the first 20 mins of trading. When they finally did open the ask was 5 and the bid was 0. Once it settled down I got lucky and closed near the high for the day and broke even.

My AAPL spread is almost at max gain. I tried to exit this morning for a 5 cent debit but hit the wrong contracts and entered a bear put on some different strikes instead. As I unrolled my mistake I picked up $15, that covers all my commissions and then some. How's that for a silver lining?

The Jungle

Well I guess that's what you call an earnings surprise. AMZN up 25% on the news. The chart says all I have to say about it.


It also looks like AAPL is up after hours on its earnings news. I have a 115/120 put spread, I imagine with the volatility crush that should happen tomorrow I'll be able to close it out for most of my max gain.

I sold half of my COL and POT calls per my rules prior to earnings. Both of them were offset with put spreads that expired last week.

Tomorrow I've got my eye on a couple stocks. APA is looking like a textbook bounce entry, earnings are tonite so I've got a buy stop in for tomorrow 20 cents above today's high.



AZC is getting close to an entry as well. This stock has fairly low volume so I'm not going to take a full position in it, probably just a couple hundred shares.


Yet another potential bounce setting is RIMM, nice thing here is that earnings have already been released and the expectation is that this trend should continue until the next earnings. This has me thinking more of a trend trade than just a swing.


That's the beauty of general market pull backs in a strong uptrend, lots of bounce entries. You could even call them bull flags if you want. All I see are entries. Have a good time with them!

Pull backs

Some great action in the market today. I got stopped out of a couple trades this afternoon. Supports were holding up well and then there was a huge sell off at the end of the day that triggered a couple trades. The Dow gave up 226 today, bringing it to the previous resistance level. The S&P and particularly the Russell showed a lot more weakness.

I got stopped out of a couple of trades today. CKP and part of my AMZN earnings speculation both hit stops. However, I do still have a couple of the calls I bought on AMZN yesterday and as of now it is up $12 in after hours trading.

I bought ACH yesterday on the breakout, not huge volume but it wasn't a really strong resistance. OK day today, still within parameters. I'm not big on trading China stocks but I thought I'd venture into their world. at 52.50 I'm tightening my stop. I should either get a great run or a quick profit.


COL and POT pulled back some today, gave up some of the unrealized gains but still following my rules. Earnings here we come!

Oh yeah, I jumped into ZMH on the bounce yesterday going into earnings.

Max Gain

It's a wonderful phrase, really, and the goal amongst all spread traders. Max gain. The illustrious mystical place where all the stars align and your short strike expires worthless. That's what I live for with my spreads. That happy realization of all of my gains. And it can happen every month! Life is good.

I met a man at the airport coming back from Chicago last week who trades spreads, debit mostly. He told me about a couple of his trades, they sounded fine and said that he should be loving life when today arrived. It was then that he told me they were Jan 08's. In the nicest possible way I could I told him he was crazy and to run the numbers for the front month next time, reassuring him multiple times that the return would be almost the same with the ability to do it monthly instead. Silly mortals.

AZO gave me max gain today, as did POT. AMZN gave me the less fun "break even". Bearishness took over and pulled most stocks down today. In a conversation with a friend the following exchange occurred:

Andy says:

I feel that things are going good today even though the markets down a little

Beej says:

That's cuz you're following rules

Beej says:

Good feeling, isn't it?

Andy says:

It's great

I love pull backs, lots of stocks setting up for bounces with our huge earnings week coming next week. My bullish watch list includes ACH & AZC (thanks to the great momentum in mining), CROX, ICE, ONAV, RIMM, TASR, and for the first time in a long time ISRG - what a breakout.

Enjoy your weekend!

A record day

The Dow closed at 14,000.41 and that is a record. It only closed over 14k by .41 but it is still a close over 14k. I'm sure CNBC has a banner across the bottom of its screen with flashing lights and exploding fireworks that says "BREAKING NEWS" announcing the dawn of a new age with commentators going on and on about how we'll be at Dow 15k by year's end. I'm not saying this to proclaim a bearish posture on the market. That would be silly. I'm quite bullish at the moment, I just think the channel is overrated and should be done away with.

This momentous event has prompted me to finally create my trading blog. This will simply be a place for me to talk about what trades I'm looking at or am already in and maybe give somebody an idea for their own trading account. It will also be a place to hold myself accountable to my rules by stating publicly exactly what I'm doing in a given trade. I hope it will be therapeutic on some levels.

Today was good to my account, given my bullish posture, but I'm getting a little nervous for tomorrow. As options expire I've got a couple spreads that are dangerously close to my short strike prices. AMZN has been driving me nuts. I'm short the 72.50 puts. At this point I'm just hoping Google's earnings drop won't affect me too much. After hours trading is just a penny above my strike, gives that fun queezy sensation to just think about it.


AZO and ICE are the other two I'm watching closely as they expire tomorrow.

My trend trades are going great. CKP is showing some weakness prior to earnings next week, but it did that last earnings too. I'm out 3% below the trend line right now.


COL is going very well right now. These now ITM calls are up 100% as of today. I'm going to sell one the day before earnings and let the other ride.


Finally, my proudest trade. With earnings coming out options around the market are hugely over valued. This makes going long a call really hard. I wanted to get in POT and ride it until earnings. So, to help offset the cost of the over priced calls I sold a put spread ATM. I got in on the bounce with both the spread and the calls. Looks like I'm going to keep the spread and be able to ride the calls until earnings.