Archive for February, 2009

ROBIN IS STILL WAITING FOR A BEAR MARKET RALLY.  THE MARKET CONTINUES TO FALL BUT HAS SHOWN REMARKABLE STRENGTH IN THE FACE OF SOME MISERABLE ECONOMIC NEWS.  THE MARKET’S REACTION TO RECENT LOWS IS SURPRISINGLY COMPLACENT AS EVIDENCED BY A LACK OF REACTION IN THE VIX (SEE THIS WEEK’S COMMENTARY).

THIS HAS BEEN A NEWS DRIVEN MARKET AND HAS MADE TECHNICAL ANALYSIS EXTREMELY DIFFICULT.  WHEN EXPERIENCING THIS TYPE OF MARKET, TRADERS NEED TO BE ESPECIALLY NIMBLE BECAUSE IT BECOMES ALL ABOUT REACTION TO EVENTS.

Monday, the market tanked in fear of Bank Nationalization rumors, finishing lower by 251 points in the DOW.

Tuesday regained most of Monday’s losses due in large part from positive comments by Bernanke allaying fears that Bank Nationalization is on the horizon.  Ben also predicted a shorter recession, which led to a 236-point gain in the DOW.

Wednesday saw continued trepidation regarding Bank Nationalization despite Obama’s upbeat address before Congress on Tuesday night.  Treasury began “Stress Tests” of the Banks as the DOW sold off 80 points.

The market put up a good fight Thursday despite bad GM news and other negative economic reports.  The DOW gave into selling pressure and finished down 89 points.

The week mercifully ended with a 119-point loss on Friday, due to a horrendous GDP report and news that Citi will now be 36% owned by the government. 

2009 has had an absolutely abysmal start with the DOW dropping over 2000 points from the first of the year.  Week over week, the DOW was down 303, the SPX off by 35 and the COMPQ worse by 63.  We broke critical support levels this week, most notably, the 741 low from November 21^st on the SPX.

If you want to learn how to prosper in this market go here!!

-We have been trying to catch a falling knife instead of following what the market is telling us.  In this market, we need confirmation on directional moves and reversals.  The market is moving on the whims of whatever news event is relevant.  We are still due our bear market rally and it should have happened by now.  Technical analysis is always trumped by news and this is a news driven market.  We broke a critical level of support on Friday 2/20 at 7449 on the DOW.  We stayed below that level all week.  On any move back up, we must contend with that level before advancing higher as old support becomes new resistance.

The momentum continues to the downside, however, it is important to remember that support and resistance levels are never “exact” points on a chart, they are zones.  Let’s let the market tell us where it wants to go and then we can pick logical targets for the move.

-Stout support was broken at 741.  We need to see if the break is for real.  It must stay below and possibly retest that level as new resistance.  We are at support of 733 from April 1997.

-The NASDAQ has shown great strength in this bear market.  We have an inverted hammer at trendline support.  Let’s see if it holds.

TOOLS OF THE TRADE

THE IRON BUTTERFLY

 

 

 

The Iron Butterfly is much the same as the Iron Condor discussed in last week’s blog.  It is comprised of both puts and calls and has four legs to the trade.  The difference is that the Iron Butterfly places the short call and short put at the same strike price.  As a result, we have a nonexistent body as opposed to the body of the Condor, which is quite wide. 

The strategy optimizes an absolutely stagnant trend.  Maximum reward is achieved when the underlying stock or index finishes precisely at the strike price of the short options.  The position quickly begins to lose as the underlying moves in either direction away from the short put and call strike.

The Iron Butterfly is a credit spread and the maximum reward is the credit received.  The credit equals the short options credit less the debit of the long options.  Maximum risk is the difference in the strike price of the short and long option less the total credit received from both short options. 

I will normally only place this trade with a very short period to expiration, given the trade will lose if it has time to move from the midpoint of the Iron Butterfly.  Study the risk graph and you should gain an understanding of the trade’s potential and its’ risk and reward.  Best, Robin

ECONOMIC REPORTS

MONDAY 3/2

Personal Income, Personal Spending, Core PCE, Construction Spending, ISM Index

TUESDAY 3/3

Pending Home Sales, Auto Sales, Truck Sales,

WEDNESDAY 3/4

ADP Employment Change, ISM Services, Crude Inventories, Fed Beige Book

THURSDAY 3/5

Productivity-Rev, Unit Labor Costs, Initial Claims, Factory Orders

FRIDAY 3/6

Average Workweek, Hourly Earnings, Nonfarm Payrolls, Unemployment Rate, Consumer Credit

 

 

EARNINGS OF NOTE

MONDAY 3/2

AIG, CCO, DISH, SATS, MDR, SRZ, WEN

TUESDAY 3/3

AZO, BMO, CHS, GOLF, ISLE, JTX

WEDNESDAY 3/4

ALY, BIG, BWS, CWTR, JOYG, LIZ, PETM, SIGM, TOL, WTW, AUY

THURSDAY 3/5

ABI.BR, CIEN, CLNE, MRVL, MVIS, URBN, WIND

FRIDAY 3/6

ANN

 

The move down this week was not associated with a lot of panic selling. The VIX, which is an index of fear, was relatively high at 46 but did not spike to the high levels that were seen when we last hit the lows in the market as we are doing now.  The January 20^th low in the SPX posted a high in the VIX of 57, the November 21^st low of 741 saw a high of 81 in the VIX. 

It almost feels like a slow methodical death.  However, I interpret this not so much as selling but lack of buying.  Again, this scenario lends itself toward a vicious rally that will be enhanced by short covering.  The question is when will that happen?  We are getting to territory that hasn’t been seen for ten plus years.

  Fundamentally, there are many questions that still need to be answered regarding the financial crises and Obama’s stimulus package.  I feel that the bulls will not stay out of the game much longer.  There are massive amounts of money just sitting on the sidelines and when the move happens, it will be quick and large.  Do your due diligence and if it feels right then position yourself for that move.

We are currently at critical levels of support.  The market will tell you which way it wants to go soon.  Keep in mind that any move could be a head fake, but is much less likely to be a false breakout if it is associated with big volume.  Best, Robin

ROBIN CAN EVEN MISS A CALL NOW AND THEN!! It looked as though the market was poised for a bounce this past week, but it didn’t happen. I was premature on my bullish call as the market fell to test November lows. However, I still believe we have a bear market rally just waiting in the wings.

Even though the market took stocks down, I am able to position myself for profit on the bounce at the bullish turn. How do I do that?? My hedges have significantly reduced the cost basis of my portfolio and as a result, it will only take a modest move back to the upside to produce profits.

Now just think how you would be faring as a “Buy and Hold” investor. You would probably be sweating bullets and may be considering closing your positions to stop the pain. Just when you do that, the market begins to turn, but you sold at the bottom. Even if you held on to your positions, as a B&H investor you have a long road back up to your cost basis to recover. So, you see, even if I’m wrong on the timing of the market, I still win with “The Way” I trade. Obviously, it’s very rewarding to be right in direction and I work hard to be on the right side of the market, however, there are times when it just doesn’t happen that way.

Wouldn’t it be nice to know that you can still profit when you are wrong. If you want to know how I do it, just click here for three free lessons and you judge for yourself. Best, Robin

Monday, the market was closed. We started the engines on Tuesday with poor numbers from the Empire State Manufacturing Report. The automakers were preparing their survival plan to be presented to the Treasury Department as the DOW fell out of bed, posting a 298 point drop.

The market put in a DOJI candlestick on Wednesday which is indicative of indecision as everyone was busy trying to assimilate Obama’s $75 Billion plan on housing. Housing Construction was down to record lows in January as the DOW finished higher by 3 points.

Thursday, the market held up reasonably well amidst poor unemployment numbers and a poor Philly Fed Report. The DOW dropped 90 points.

The week finished with an interesting session. Options expiration day can be volatile and Friday was no exception. The DOW posted a low of 7249 before pulling up to finish at 7366. The session produced high volume and formed a Hammer like candlestick pattern which is a bullish signal. The session broke the intraday low of 7449 which was registered back on 11/21/2008. The SPX still has 29 points to fall before testing its’ lows of 741.

Week over week, the market fell hard with the DOW losing 484 points, the SPX off by 57 and the COMPQ worse by 93.

-We broke through very stout support at 7449.  In order for the move to be a valid break of support, it must retest 7449 and confirm that old support is now new resistance.  We should have that retest this week.  Should the index break back above 7449 with volume, then 7449 will still be good support.  We are due for a Bear Market Rally soon.  We are testing a triple bottom as seen in the 20 year chart of the DOW.  If this recent break of support is confirmed, then the next stop is 7197 from Oct. 2002.  Additional support is found at 6500 from early 1997, 5500 from 1996 and 3500 from 1994.

-We experienced a classic capitulation ay with a Hammer candlestick at the bottom of the trading range testing multi-year lows on big volume.  I was early on my call last week, but I cannot deny what the charts are telling me.  We are due for a Bear Market Rally with the first test at the swing low of 804 from Januaty 29th.

-The COMPQ has been most resilient in this downtrend.  It is my opinion that the NASDAQ and Small Caps will lead us out of the wilderness.  Look for the index to first test the recent gap down at 1460 on a bebound.

-The Macro picture of the markets are revealing.  Many times we get caught up looking too closely at the small swings in the market and forget the big picture.  This confirms that we are at a critical level.  I look for the beginning of a turn around here.

-