VOLATILITY GALORE

Interesting week ahead of us..

1) Options expiration
2) Financials Report

Currently...

Asian markets are tumbling..but our futures are not off as much as I expected.

I see two different scenarios at hand:

1) too many institutions probably still have too much inventory on hand, so they may "prop" these markets up before the earnings

2) or they short this market (beginning of the week) prior to the earnings and then spike it back up (Reverse of what you might see in a bull market - buy the rumor sells the news - BUT a sell the rumor, buy the news), before unloading in May.

We probably won't see any "huge" crashes...they will relentlessly put a positive spin on "not-so-bad" news, but we know the overall market trend is down. We will make news lows before we make new highs.

Our RSW position should pay off in the long term and the intermediary we should not worry about the minor market fluctuations (the games the institutional trading floors have to play when unloading stock).

SOME IDEAS:

1) Creating some option spreads in the front month, on some of these volatile stocks that are reporting such as GOOG, BIDU, or a financial such as C.

2) SWC is poised to drop hard, ALL day tomorrow. Platinum, palladium prices are tanking in the Asian markets. Probably a good place to scalp some profits either with puts or a short position (if you can find shares).

3) I would like to buy up some SID on a pullback...it's a Brazilian steel company, with a very healthy chart and GREAT balance sheet.

Indecesion - Sector Rotation

Time to stick our wooden stick in the Sand, and wait for the tides, to give us a better sense of direction.


This is a bit delayed but my feeling Monday was that there are many "psychological reasons" to push this market higher

* bear sterns was the bottom
* people are seeing value
* Technically the chart might make an intermediate term higher high (it's been a while).
* the market has discounted all the bad financial, and real estate news
*The notion this recession will be short lived (economic data isn't very transparent)
*regulators won't be muddying the water until next year

But I still remain skeptical of these rallies.


An interesting option strategy idea:
buying VIX May calls at 32.50 and May 25 puts. I noticed some unique volume at these two levels intra-day...I believe someone was creating this spread. Seems like a good strategy on a risk/reward basis.

Time to look at some individual selections.

NLY -

1) huge GAP down from 22 down to 11.
2) retraced back to 17.25, formally a line in the sand, where there was a war between buyers and sellers, previously the buyers were victorious. Now it's once again acting as resistance and has rejected the buyers three times at 17. (volume is drying up)
3) Put stops above the 17.25 region.
4) My goal is to see an exhaustion gap back to around 12.50.

SWC -

1) on 4/1 one could call that a reversal candlestick but the volume wasn't quite there for an actual reversal today.

2) Todays up move was healthy in the construct of the supply/demand equation.

3) I suspect it will trade in a range from 15-19, while inventory is unloaded (or maybe accumulated - if that's the case will be bad for my position). It's temporarily poised to break out to around 19, which could create a great shorting/selling opportunity - under the premise that the volume is light. BUT I wouldn't be surprised if the price heads back into the falling the wedge and it fails to break out.

Also keep your eyes on some of the bigger solar names (ala FSLR) -- see if they break out to new highs. If they fail to produce newer highs, many of them might be short candidates again.

AZO - could be forming a very (rare) bearish diamond formation. Started adding to my short today.

AND LASTLY, we should keep our eyes glued to the homebuilders, namely RYL, really healthy chart. I would like to see it pull back some - then maybe buy some up. One of the best inverted head/shoulder patterns (very bullish)

The Great Crash

I decided to re-read Kenneth Galbraith's, 1929: The Great Crash, this weekend as I was starting to feel generally bullish on the market.

Here is an excerpt I thought I would pass along, my inclination is that you should be able to draw some parallels from this book...

"On Thursday October 31, 1929 well over seven million shares were traded*, and the market made another good gain. The Federal Reserve lowered the rediscount rate from 6 to 5 percent. The reserve banks also launched vigorous open-market purchases of bonds to ease and liberalize the supply of credit"

*New record at the time.

"As Goldman Sachs had done - In the last analysis, support of the stock of one's own company still seemed bold, imaginative and effective of course. Indeed, it seemed the only alternative to slow but certain death."

In summary, this book has great quotes, from all the figureheads of the time. Shows the framework between political figures (Hoover) - the bankers (Morgan) - the academics (Fisher) - the media - and the average investor in the Financial Markets. In retrospect I don't believe much has changed.

Anyone notice how they Greenspan can't be found quotes in any US Financial Publications anymore? You have to venture off to British publications.....In the Financial Times he said, "things will not improve until the housing market turns around"....I believe there is some great validity in that.

I'm keeping my own accounts in cash/shorts. I'm going to miss many of these decisive upward moves. But I still won't be able to bring myself to hold long overnight, only day trades.

Here is a chart of the pompous prognosticators, or our modern day talking heads, like Jim Carmer, on CNBC:

http://www.gold-eagle.com/editorials_01/seymour062001.html

Gift from the bulls to a bear

Coming into this morning I wasn't very happy with my short exposure. Luckily the bulls kept things-a-float before the potential flush comes.


Bought into SWC puts. April 17.50. Technically this could head to around 16.15.

My JASO puts were practically unchanged as the stock refused to break the 14.30 area with any conviction.

Me thinks that many of these solar stocks will become akin to the JDSUs of the tech bubble. Out of 100 solar companies -- many of these have billion dollar market caps purely because they were apart of the solar bubble. Sure the internet was going to change the world, but many companies crashed and burned in that bubble. Right now WFR and FSLR seem the most poised to dominate the solar sector, but of course where do you value these guys? The smaller JASOs of the world, seem like the better/safer shorts for now.

Still trading myself in and out of the homebuilders. RYL more specifically. I can almost gaurantee this is where the momentum will come -- the only question is when?

Will the ISM data tommorrow or the Job report on Friday be the catalyst for the market to test new lows. With how i'm positioned now...best case scenario we slowly drift lower into friday and on Friday we see some good ol' capitulation. Since the bears/bulls seem undecided in the short term we will probably stay range bound.

Great Quote

Barry Ritholtz:

“As we have seen time and again on the Street of Dreams, Wall Street pundits take months, if not years, to accept what is before their very eyes. Whatever you want to call it -- cheerleading or Cognitive dissonance -- it is a fact of life that the obvious takes much longer to be accepted than is logical. Hence, this simple numerical inflation fact, reflected in global food prices, record energy and both industrial and precious metal inflation, will be ignored for as long as possible.”

Great day in the wedge.

The markets are very confusing by nature. With all this day-to-day volatility my take is only the traders are making all the money.

You should probably wait until this "wedge" reveals itself on the dow.
The price oscillation is clearly tightening, and we closed a little bit below the wedge, but the problem with "wedges" is they don't give you any direction up or down, all we know is there will be a big move once it breaks out.

I didn't like the stochastic divergence as MOS rose, but it's a great hype play and you should never trade against the hype, just be careful in this market. Today might have been a good day to lighten your load, but not load up quite yet. I'd like to see this come down some and then trade sideways before I'd want to enter. But if you're gonna short anything energy look at DVN, all that upward momentum and zero news, not the best of breed company. This could have some big gap downs, but of course the overall market breath and oil need to retreat some.

JASO should retrace back to the 61.8% fib, at 15.15. Before possibly forming a bottom, if it breaks below that 15.15 level, short as many shares as you can get your hands on, but look out for a reversal. On the upside the next shorting point - crucial fib level - is 19.13. If it can't break that the ride is almost definitely over for JASO. STO looks poised to sell off this recent bounce. And turned down right
on the intermediate trend line. But cover it breaks the trend line on the upside.
Keep your eyes on the VIX, it should send us signals before the overall market will.

Nice close on AUY today, but once it breaks 17.50 (knock on wood, if it does) I'll probably be looking to sell it. I only have 10 contracts.

We will probably gap down tomorrow. Then they might fill the gap in the indexes and move us back into the wedge. So tomorrow morning might be an OK point to get rid of the q puts, especially if the VIX spikes upwards.

According to my fibs the low of the day on the S&P won't be below 1330. If we do break that then look for 1317.

Disclaimer: One shouldn't focus all their attention on these fib levels, they're more of a guideline to the market forces.

Before the Light of Dawn Comes Pitch Black

This is exactly why I didn't feel confident going long in the market. We never had our day of capitulation, aka, no bottom. This might have been on the back of most traders minds.

The market makers lifted the curtain today. That manufactured "rally" we saw last week, came to a fast and furious halt. I went into this week completely short. We're about to retest the January lows. This will be the deciding factor, whether or not you want to be long. I would not go long any stocks until after option expiration. The swings are vicious in this market.

Let me recap my current stance.

Puts in MOS. Fundamentally flawed companies, such as Mosaic, will be eaten alive by the 800 pound gorilla (DOW/S&P/NASDAQ). Growth stories can not support such elevated levels of valuation.


ILMN. Was up huge. I suppose there was some validity in the open interest in the march 80 calls going into earnings. I held my calls overnight, this is set up for $80. We'll see it's a gamble.

FSLR. Bull Trap might have been in play? They can't keep it supported with such horrible market breadth.

FSLR, RYL, ILMN, MOS, IHP

FSLR broke through that "triangle" and onto the upside so the momentum traders should start piling on. It might be a bull trap (but I doubt it...they want to keep it in the 185-230 range, based on the open int. in the march call contracts). So I figure it will have a pre-earnings run. Might be a good long to play in equity heading into earnings Feb 14th, while hedging in some puts along the way (later in the year OTM). I can't see this making new highs above 280. A 30%+ correction in Jan, showed me this was fundamentally flawed. When the earnings come out--they will have to BEAT guidance, and either announce a contract or have some AMAZING forward looking guidance. IMO all hopes and dreams.

RYL buy.

MOS keep on watch list, might make a dynamite short.

ILMN speculation of GE buyout, huge open interest on the march 80 calls. Good growth story, earnings come out. COO, founder of company quit, and current CEO specialized in M&A, do the math. GAMBLED on some calls.

Bought puts in IHP. dangerous b/c of larger spreads. Most of the damage might have been done. There isn't really a chart pattern like this in any of the "books" but looks very bearish to me. Keep your eyes on it.

Million Dollar Question: WHERE ARE WE HEADED?

There was something very odd about the last rally in todays trading. The day seemed like a manufactured pump in stocks across my watch list. I call this an engineered rally, because I believe it was primarily based on the fed cuts. With cuts come change of models/irrational exuberance.

But, many pundits keep calling these economic conditions similar to the late 1970s -- there could be some validity in that. Although we could just be jumping to conclusions. I think we're seeing the first sign of painful inflation for days to come -- not too mention the beginning of a plausible credit Armageddon.

More importantly, my short-lived economic brain can not make you money. But take a look at these important fib levels to figure out where our market could be headed. Many think a bottom is in, I think otherwise should be looking to re-enter shorts in a big way.



Will look to buy OTM money on many high PE Flyers that I think will get flushed. It's Russian roulette at this point. AMZN, YHOO, GOOG, AAPL: Who will be next to step up to the plate?

Solar Stocks Tumble

What a day. Shorted FSLR at 159.3, covered at 147.2. Shorted a small portion of my account on HLCS at 14.5. The market had a nice afternoon rally to sell into. I bought April OTM calls in RYL, flip the chart upside down and it looks like a head/shoulders, dangerous b/c they report earnings tomorrow, so I only bought half the calls I normally would have will load up on more if earnings go as planned.

They flushed most of the high PE Flyers today (see APPL, FSLR, GOOG etc). Could be good for some short term bounces. However, I absolutely refuse to trade a bear market long. I will wait for re-entry points and then short.

We are experiencing an afternoon rally from early morning lows. On the lows today we were experiencing light volume, so it was rather obvious there would be a reversal. There is an hour left of trading, we might have a key reversal day, if we can manage to close in the green. My friend has a theory that might bode true-- since we missed out on the capitulation day yesterday via the fed, we might get a huge rally (as bear markets tend to have some good short term buying opportunities) followed by a major day of capitulation. Once the media starts saying a bottom is in, over and over, this is probably a good sell point.

Will make a new post either later in the day or tomorrow.

Fed Cut- avoided capitulation

This morning the volatility index rose to 37.57 (the highest reading since October 2002) many buyers/traders were able to jump in the market with long positions at this level. Perhaps this was a notion of psyche, as we finally got the well needed VIX spike to indicate a market bottom. Tomorrow AAPL reports earnings could lift the markets. Look out for a high volume reversal day.

But bear in mind, today should have been a day of capitulation. The FED clearly panicked. You can't solve the economic problems with cheaper money. Fighting fire with fire, ultimately will cause more problems down the road. The only chance we have to escape a bear market is positive economic data and readings that indicate we may not be in a recession.

Would I rather trust the Fed or the free markets? I was utterly surprised and somewhat disgusted to see the FED interfere with the free markets. You should allow things to work themselves out.

They did keep headlines from being inked "Black Tuesday" around the world...but they may have created more hardship later on. The fed made 08 more painful then it had to be. Imagine if Ben "The Helicopter" Bernanke didn't waste all that ammo last year and was able to gradually cut rates. Ultimately the market would have looked much healthier technically and inflation would not have been such an issue. George Soros might be right, this is the worse he has seen the financial market since pre-1944.

We will see how this plays out. I'm loving this volatility. Covered my HLCS short at 14.32. Edit: Covered my FSLR intra-day short at 171. Sold my MELI calls for a reasonable profit (the FED cut saved me and many others who were trapped). Good luck. Now i'm in CASH waiting for the charts to show me something worthwhile.

2008 Market Crash, Black Tuesday.

STAY IN CASH. The indexes around the world gave an indication that the US is in fact in a state of recession. Look for a large day of capitulation tuesday. After the crash in 01' the indexes ran up 20% or so, before heading back down, we could see a potential similarity. Tonight, the overseas indexes are going to tell quite a tale. If there is a continuation, you will surely see panic.

The "Blood" Diamond Follows Through

If you had read my post a few weeks ago you would have seen the Diamond Pattern formation on the S&P, followed shortly by a bloody mess! MAYBE chart patterns do work.

In the bull market of the 1990's, four of every five market leaders were new companies that went public during the 1980s and early 1990s due in part to the lowering of capital gains tax rate. This acted as fresh blood for mutual funds/institutions. They had innovative product lines just as First Solar has. But MIND YOU- true market leaders (ala FSLR in 2007), the ones that doubled/tripled, Fall by an average of 72% (data compiled by IBD). I covered my most recent short position on FSLR, as it might get an intermediate bounce before heading back down. We really need the S&P to confirm we're in a bear market, if we are, FSLR might be looking at a 72% correction from its 180 high.




As far the S&P index goes, we could be looking at a near term rebound. Next week we have a slew of earning reports that I believe have the potential to be blowouts. Followed an interest rate cut the next week. These events could act as a catalyst for a big move up or down. We might see a capitulated week where the US indexes are in for a rough time. I, however, think we'll see a bounce off these levels.



This is a completely absurd speculative play on my part. I bought calls in MELI yesterday. MELI is suppose to be the EBAY of Brazil. The growth opportunity there is tremendous. As long as the S&P turns back up, this thing could ride on some real momentum this week.



Take notes of the RSI on all the charts. The RSI might be giving a reading of the behavioral tendencies in the marketplace. I believe they overshot previous lows because of investors expectations. People tend to overshoot reality. Perhaps the selling was a bit outlandish. It's dangerous to be a bear in this market as this could cause a major whiplash. Either way, some real money will be made, be nimble.

Presidential Speeches, Talk of Blood Baths

Well if any of you have ever studied any great American stock market crashes -- you realize that everyone perceives everything to be safe and sound -- until someone pulls the plug. My thoughts are that we probably won't be in for a crash anytime soon, however, this could be a slow and strenuous downward trend of our various stock indexes. We must keep our eyes locked on the major market indexes, for our trading schemes.

Anyways, today was a very good day for a short in the market. If you look at the returns in January for momentum stocks, it's a month in which they seem to topple, possibly because of institutions holding for tax purposes into the next year. Booking gains with covered calls and unloading. Almost all momentum stocks on my watch list traded down, even as the S&P turned up.

Solar took a beating, SOLF and CSUN, were both hammered. You can almost be assured about 3/4 of these Solar jokes will be trading on the pink sheets someday.

My favorite to watch is FSLR. Her handlers are very keen. She has the ability to make the move back to 252 early tomorrow. However, I feel as though it will close down. The MACD looks very bearish.

Diamonds in the Rough

Let's briefly recap the days events.

*Turmoil in the Japanese markets followed by much of the same in the US marketplace.

*A flight to quality. Bond yields decreased as prices went up. Will the fed step in Monday? Doubtful, but they may call an emergency meeting this week if equity prices keep falling. From my brief analysis, the market will not crash unless we have another 10% drop off from here, then things will get interesting to say the least.

*INTERESTING THING TO NOTE: This fall in our markets came with a very tame VIX reading. What does this mean? A tame VIX, falling markets, are we truly in a bear market?

The momentum stocks finally were taken for a ride down today. The solar sector which has been blazing hot finally came to a halt. Led by the streets favorite: FSLR. They had FSLR pegged against the S&P all week, but due to increased short confidence and lack of covering, they had to set it free today. Where we go from here is an interesting question. If the S&P breaks below the triple bottom, FSLR and other momentum stocks will surely follow suit. The decline could be fast and furious.

On the other hand if Helicopter Ben decides to throw some more bones out there, the market could have a 300 point pop when he decides to do so. But even with that slight recovery, I feel as though the bears have taken control for now. With all this "TALK" of recession, it might mean we're actually in a recession. The market has not confirmed a recession yet. We need more consecutive down trading days to follow suit with William O'Neil of IBDs thesis.

Good luck next week: stay on top of the news.

what may come of 2008

In 2007 we sailed some turbulent waters, it looks as more of that is to come in the beginning half of 2008. Tim Knight has pointed out that the DOW/S&P are forming a very rare and bearish diamond top formation.



Due to the January seasonality effects and poor market conditions: Momentum stocks could be in for some sharp drops before I would recommend reentering. All traders should have their triggers ready.