Archive for January, 2009

 

 

-The INDU is trying to break resistance at 8348.  The index has shown me that it wants to go higher as evidenced by a “Tweezer like” candlestick formation on Thursday and Friday.  The DOW will have significant difficulty breaking below 7900 and staying there.  It is much more likely to go up, but must show us conviction with strong volume.  If it breaks resistance at the 8340-8350 level and closes above this mark, the index will likely continue up to test the 8900-9000 area.  I have included, for your enjoyment, some brief information on “Darvas Boxes”.  Nicholas Darvas has two very interesting books on his theory.  They are an easy read and can increase your feel for how the market moves. 

The SPX has resistance at 850-860 level.  If the index can break through and close above this area with volume, it can continue up to test 944.  It is unlikely to break support at 800. 

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-The COMPQ has immediate resistance at 1493.  If the index breaks and closes above this level with volume it could continue up to 1603-1666.  Strong support resides at 1398.

TOOLS OF THE TRADE

THE BEAR CALL

 

The Bear Call is the mirror image of the Bull Put Vertical Credit Spread that was covered last week.  It is also a vertical credit spread but optimizes a stagnant to bearish trend.  The trade is ideally place above defined resistance with 30 days or less to expiration.  The position is a spread trade that is comprised of two trading instruments that we have previously discussed in our series on risk graphs.  The two instruments are the 1) short call and the 2) long call.

As mentioned last week, traders who are unfamiliar with spread trades may question the efficacy of placing two trading instruments that seem to be at cross purposes.  We know that the short call optimizes a bearish move whereas the long call optimizes a bullish market.  An understanding of the position comes into focus when we realize that each trading instrument in the Bear Call has a specific duty. 

The short call is a premium collection tool whereas the long call limits risk.  More specifically, the short call is ideally place above resistance of the stock traded but below the long call in the same month.  The spread of the strikes that the trader chooses will be determined by the amount of return and risk that the trader wishes to take.  The wider the spread, the greater the ROI but the risk is also increased.

Study the risk graph on the Bear Call and you will gain an understanding of the risk and reward of the trade.  Best, Robin

ECONOMIC REPORTS

MONDAY 1/26

Existing Home Sales, Leading Indicators

TUESDAY 1/27

Consumer Confidence,  S&P CaseShiller Composite

WEDNESDAY 1/28

Crude Inventories, FOMC Rate Decision

THURSDAY 1/29

Durable Orders, Initial Claims, New Home Sales

FRIDAY 1/30

Chain Deflator-Adv, GDP-Adv, Chicago PMI, Michigan Sentiment, Employment Cost Index

 

 

EARNINGS OF NOTE

MONDAY 1/26

ACV, AXP, AMGN, CAT, FCX, HAL, KMB, MCD, NFLX, QLGC, STLD, TXN, TSN, VMW, VLTR, GWW

TUESDAY 1/27

AKS, AMLN, BMY, ELY, CP, CHKP, DV, DD, ETFC, EMC,GILD, JEC, NUE, BTU, RFMD, STJ, SYK, JAVA, TLAB, HSY, MHP, TRV, TUES, X, VLO, VZ, WDR, YHOO

WEDNESDAY 1/28

AMP, T, BHI, BSX, COP, FIC, FLEX, GD, HES, LM, MTW, MUR, NVS, PFE, RYL, SBUX, SYMC, ALL, BA, USG, WLP, WFC

THURSDAY 1/29

ALK, MO, AMZN, ACAT, AN, BLL, BDK, BRCM, BC, BCR, CELG, CB, CL, COLM, CAL, EK, LLY, ETH, F, FO, HP, IP, JBLU, JNPR, KLAC, LLL, LEA, MWW, NWL, OXY, OXPS, OSK, OSIS, PFS, RMBS, RTN, RCL, SNE, SNE, HOT, SPWRA, TROW, UA, LCC, WYE, XEL, YRCW, ZML

FRIDAY 1/30

ACI, CVX, XOM, FUJI, GCI, HMC, FSTR, PG, SPG

 

Shall we measure the Bush years?  Bush entered office a young man and exited a much older man.  From a purely physiological standpoint, those that measure aging suspect that Presidential aging is about two times faster than the normal aging process.  Not surprisingly, one could even accelerate that ratio in Bush’s case.  Our former President presided over an administration that suffered through 9/11, the subsequent war in Iraq, Katrina and two major recessions.  Our current recession rivals the financial debacle of Hoover’s Presidency.

Looking strictly at the numbers, Bush began with approximately 6 million Americans unemployed and ended with over 11 million out of work.  An environment of de-regulation prevailed as corporate malfeasance and scandals became daily news.  The SEC has become a laughing stock.  Oversight was ‘asleep at the wheel’ as AIG and others concocted ‘credit default swaps’ a derivative instrument that was designed as a insurance type policy that was to pay off when debt instruments went into default.  The problem was that the CDS activity was totally unregulated and without the ability to fulfill the obligations.  The CDSs created a false sense of safety and security that exacerbated unrestricted lending and borrowing.

Estimates in 2001 were that the federal budget in the following 10 years from 2002-2011 would be at a surplus of over $5 trillion.  That estimate has now been amended to be a $5 trillion deficit for a swing of $10 plus trillion.  The timing of this deficit could not come at a worse time with baby boomers (those born between 1946-1964) looking to retire and beginning to access social security benefits.

We are currently facing a deflationary spiral.  Lower prices on goods and services leads to less spending as consumers wait for those items to be even cheaper.  That translates into reduced corporate profits, poor earnings and a declining stock market.  Subsequent to that are debt defaults and layoffs resulting in unemployment and the cycle completes.  The unemployed don’t spend and those that do still have jobs fear for their jobs and are reluctant to spend as well.

The parallel between the Herbert Hoover/FDR transition and that of the Bush/Obama transition is strikingly similar. Obama’s infrastructure plan is reminiscent to the WPA projects of the 30s.  Who would have ever thought that we would be revisiting the challenges of 75 years ago? 

History will judge Bush’s Presidency.  In the meantime, I hope that we can be able to balance the budget, move back to a reasonable unemployment rate, continue to prevent terrorist attacks on US soil, make progress on the Iraq war, move forward on the global warming issue and purge Wall Street of the arrogant, unprincipled idiots.  We need to begin to restore confidence in our financial system.  By the way, I was thinking about re-decorating my office.  Can you recommend a good decorator?  Bye, bye John Thain.  You and people like you will not be missed.

Mr. President, get plenty of exercise and try to stay young.  We need your energy, vision and leadership.  Best Robin 

  

ROBIN CONTINUES TO CALL THE MARKETS!!  HERE IS THE FORECAST FROM LAST WEEKS’ BLOG PUBLISHED ON SATURDAY 1/10/2009.

“The INDU closed Friday right on its’ lower trendline.  The bearish move of this past week could begin to falter at this level, however, the index is more likely to continue its’ retracement to retest recent lows at 8348.” 

“The same as in the INDU, the SPX resides right on its’ lower trendline.  The index may cease its’ bearish move at this level.  If it breaks this area of support the next target will be the recent lows of 845-850.”

WHAT HAPPENED?  THE MARKET CLOSED AT 8212 ON THURSDAY 1/15 AND ROBIN PUT OUT A TRADE ALERT INDICATING A BULLISH MOVE (SEE TRADE ALERT FROM 1/15 ON THE BLOG) CALLING FOR A RETEST OF THE RECENT SWING LOW AT 8347-8372.  ON FRIDAY 1/16, THE MARKET CLOSED HIGHER AND RETESTED AT 8341.

THE SPX CLOSED AT 844 ON THURSDAY 1/15 AND 850 ON FRIDAY 1/16.

Earnings season began Monday with AA after hours.  AA received a downgrade and Citi had a bad day on negative news from the Wall Street Journal.  The DOW slipped 125 points.

Tuesday, AAs poor quarterly results after hours Monday and Bernanke’s less than positive comments regarding the recovery and Obama’s stimulus plan contributed to the continuing market slide.  The DOW closed down 25 points.

The DOW dropped 248 points on Wednesday led by the financial sector and specifically Citi.  Some questions arose concerning Cs merger of their brokerage business (Smith Barney) and the prudence of the deal with Morgan Stanley.

Thursday closed significantly off its’ lows after initially absorbing AAPL’s news on Steve Jobs’ health issues.  JPM beat the street and BAC was lower as the DOW closed just into the green by 12 points.

Friday, the market gapped higher on the open,  only to trade down and test lows at 8109 before steadily climbing back to positive territory finishing the day up by 61 points on the DOW.

Week over week, it was another poor showing in the markets with the DOW off 318 points, the SPX down 40 and the compq worse by 42.

Come join the professional trading team here.

 

-8348 will be important resistance in the INDU.  If the index breaks that level on volume, look for it to run to 8900-9000.  If it has difficulty breaking through, it could head back to retest the 7995-8110 level.  My best bet is that we are going higher.

-817-818 has shown to be stout support.  We are currently at strong resistance at 850.  If the SPX can break through on volume and close and hold above that level, it could continue up to the 918-944 level.  If rejected at current levels, the index will retrace to once again retest the 817-818 support.  My feeling is that we are going higher.

-The compq is showing that it wants to move higher.  The first test should be the 1600 level.  Let’s watch and see how it reacts if it gets there.  Look for a continuing bullish move this week.

TOOLS OF THE TRADE

THE BULL PUT

 

 

The bull put is a ‘spread trade’ comprising two trading instruments that have already been covered in our series on Risk Graphs.   The instruments in the bull put are, 1) the short put and 2) the long put.  Some people will not understand the benefit of using two instrument that are seemingly at cross purposes.  As we have learned, the short put optimizes a bullish trend whereas the long put optimizes a bearish trend.  So, it begs the question ‘Why even place the trade.’? 

The answer comes when you realize the purpose of each tool.  The short put is a premium collection instrument.  When the trader ‘sells to open’ the short put, the credit from that trade is immediately deposited to the trading account.  Someone you will never meet or know has taken the other side of the short put trade and purchased a long put at the same strike, month and price that you are seeking.  The market maker gets the bid/ask spread and everyone is happy.  As we know from prior blogs, this position is known as a ‘naked short put’.  The risk associated with that position is high.  The stock could trade to zero and produce a sizable loss.  We also know that the short put is the synthetic equivalent to the covered call.  So, what can be done to mitigate the risk in the short put trade?  The answer is that we can add a long put in order to limit the downside risk.  The long put is place one strike price below the short put in the same month.  The position is sometimes called a vertical credit spread.  The trade is referred to as vertical, because the long and short put are on a vertical axis one above the other and ‘credit’, because the total position produces a credit.  The short put creates more premium than the cost of the long put therefore if both puts expire out of the money, the trade will be successful. 

Another noteworthy piece of information is that the bull put is synthetically equivalent to the collar trade.  The collar trade is comprised of long stock, long put and a short call.  The bull put optimizes a stagnant to bullish trend.  Study the risk graph and you will gain a comfort level with its’ risk and reward.  Best, Robin