Saturday, March 14, 2009

Critical Mass

If you read some of the blogs from some of our favorite bloggers, you will see there is obvious confusion and uncertainty of what the market and what charts are telling us. Some of the best chartists are second guessing their wave numbers after last weeks rally. Some trend traders are beginning to see this as not only a bear market rally, but perhaps the beginning of a bull market.

It is a confusing time right now as charts are on the brink of breaking key resistance numbers and EW rules seem to be breaking. No one can tell you with certainty where the market goes from here. It's really difficult to even give odds better than 60/40 one way or the other.

In situations like this, it is usually best to lay low and let things pan out for a day or two if you are a short term investor. Perhaps play some short term trades to scalp a bit off.

What I like to do in situations like this is not bet the farm on anything and stay in as much cash as possible so if we have a big move one way or the other, you can be prepared to make a solid move. That doesn't mean I am 100% cash. There can be some big money to be made in a situation like this.

So I like to play some near term options (March and April) in situations likes this. Limits potential losses but there are some significant gains that could be had. It is the gambling side of it. But just as in poker, you want to gamble on the side of the best odds.

Studying the chart below, there are many ways to draw it. I am trying to keep it simple by trying to determine the obvious trend. First I drew the lower trend line using the most recent lows in the VIX over the past 2 months. By simply copying that line and moving it higher, I found the parallel line perfectly intersects 3 of the past 4 high marks on the VIX. This seems to show the trading range the VIX is in and which the VIX always appears to bounce from. From this we can guess that the VIX will bounce off of the lower trend line. This gives us a better than a 50/50 chance the VIX will move up and the market down.

In addition, the orange line represents the VIX low over the last 5 months. If this is breached, I believe the odds are we are in more than a simple bear rally and perhaps we will be in a multi-week rally.

So now I have to ask myself, what do the odds favor. Today I would suggest based on trend, we are 70/30 that the market will go lower from here. But that 5 month low is very close by and breaking that will get us near the 200dma and could trigger a longer term rally, thus, I think at best we are 60/40 that the market goes lower from here.

60/40 in texas hold-em is equivalent to A-J vs. K-10 pre-flop. I like my chances with A-J.

The VIX is not giving a clear signal right now, but it is not hard to imagine it bouncing off the lower trend line and moving back past the 20dma, which would represent a 50-75 pt move down in the SPX. I don't think we will see a major sell off due to uncertainties of uptick and m2m. So it is not time to take too many chances.

I am focused on VIX calls, GS puts, GOOG puts and RIMM puts. Everyone seems to think tech will lead this rally. I think tech is about to get hit hard in the next earnings period. I am in tech myself and we are getting rattled pretty hard. I don't really consider GOOG a tech stock since their revs are on online ads, but they have spent significant money on a number of tech research projects that may fizzle before they ever hit the market, or they may be shelved while GOOG tries to identify a better time to bring them to market.

And of course, I still love SRS. It has moved down (and RE is up) in sympathy of the bank moves. Surely investors realize regardless of what banks do, RE is a total and utter mess and the commercial RE market is on the verge of collapse.

Friday, March 13, 2009

That Sucking Sound May Be...

I am starting to think that given all the optimism and all the shorts switching to the long side, that perhaps, just perhaps, this is the rally that we talked about a month or two ago about how it would pull all the longs back in and even get shorts running for cover, and then, BAM!, it was just a trap to get more money into the market to get crushed. It even sucked Waxie in and some of the best TA folks into believing this rally has legs

I am watching todays action very carefully. I'm not sayin', I'm just sayin'...

All Clear!!!!

It's a bit of a long story and I will save it for later. I was investigated for insider trading activity due to messages I posted on the yahoo message boards about a person from a certain mortgage company owned by a certain bank who told me some things. Anyways, they linked me to my brokerage accounts where they saw activity around said company and investigated myself and the person at the mortgage company. After 2 days of investigation, got the message late today that the case is closed.

My accounts are suppose to be unfrozen tomorrow but I still don't have access to the yahoo boards.

I can say that it was a bit unnerving and scary. I knew I did not do anything wrong but when an agency like the SEC has the power to link a yahoo account to brokerage accounts and have both suspended, it can be a bit scary.

Anyways, I should be back in business tomorrow. My first order of business will be to buy puts on GOOG, GS and and calls on the VIX.

Good luck all. Tomorrow should be very interesting on weather the bulls want to run this up further or they do some profit taking. Either way, by middle of next week, this rally will be forgotten.

Thursday, March 12, 2009

Rally Rally, Who's got a Rally?

Nice rally for the longs. Gave them hope to get back to even. The problem is, the rally is based on hope and lies.

The hope is based on re-instating the uptick rule and and m2m modifications. Somehow these are going to make the world economy good again. ... uh.... Say what? A lot of good traders jumped on this band wagon to ride the hope train up a bit. I am guessing most got off somewhere along the way waiting to short back.

The lies are all the banks saying they are profitable. That they are well capitalized. That they don't think they need gov't help. Sure they are operationally profitable. They better be. How can a bank not be operational profitable? If they aren't they would have closed long ago.

Don't believe the hype people. This is a nice technical rally that is feeding some false optimism. While at 666 we were closer to the bottom than a near term top, we now have reversed that situation. We are now a lot more closer to a near term top than a bottom. In fact, we may be there right now.

Technically 740 was a previous low that would be a technical resistance level. But 750 is just as tough as it represents the 20 day MA. It can be broken but even it if is, 770 is another heavy resistance and as Erik points out, 804 is impossible to cross. So at most, we have 50 pts more to go up. But there is a good 150 pts that are sitting right beneath us.

The likelihood is, 750 is the top of this rally or 770. An outside chance of 800. If any news comes out the crushes the rumor and hope news that came out this week, the fall will be fast and furious. Watch Barkley's. Also watch GS earnings. Bad news from either can be big trouble.

VIX is way below the 20dma. So far below that it has to rebound soon. So technically, TA/EW and VIX all say we are near the end of this run if we have not already hit it.

This is probably a great spot to start getting VIX calls. I will be watching closely for heavy loading on VIX options. ON Monday, there were some huge trades on the VIX puts. I should have paid more attention to them. They were a sign that something was coming, in retrospect.

If VIX goes below 38, it will be the first time since October. I just don't believe that can happen. So you have maybe 2 pts down further for the VIX at most, while it could go up to 55. Very low risk/reward. Gotta jump on them. I also like April GOOG puts and I will venture into some March and April GS puts tomorrow.

Mr. Mustard Seed

Whatever you do, don't listen to Mr. Mustard Seed on CNBC. He is a joke. He thinks that since people are saving more money in their savings accounts, it makes banks more solvent. He also says toxic assets are meaningless. Wow is he out of tune with reality. toxic assets are more than 10x the amount of deposits a bank has. Its not even close.

And while he thinks people saving money into bank accounts is good, the gov't is doing everything they can from keeping people from saving this money. We're all on the same page, aren't we.

March 12th - midday

S&P approaching 740 and VIX right at the lower trend line. This has all the makings of a complete and utter reversal to do the downside in the market. Don't over extend yourself by betting the house. If 740 is breached by more than 5 pts, I would fear that longs have the upper hand. May be a great spread opportunity right now.

We should continue to go higher today but end of day, I think we start to see that move under 740 and then expect to see a new leg down in the market.

Try to ignore the news as much as possible. Talking heads on TV can lead you astray. If you must, listen to bloomberg. Much more unbiased and much less PPT. Pay attention to technicals. A VIX going below the lower trend line can be a bad signal and S&P above 740-745 could also be a bad signal. But if the market reverses end of day to avoid those numbers, it is very clear market headed down.

Wednesday, March 11, 2009

Is this Rally BS?

First, I want to say, I am still here. For those that know what I am talking about, I know what it is about now and it is concerning but I did nothing wrong so I am OK.

This is a great trading opportunity. Longs are fighting hard causing some good swing potential. As stated yesterday, VIX and S&P pretty much did things on queue. S&P rose to 730 and VIX to 43 before it halted and headed down, then bounced up and down all day, ending flat. VIX ended just above 43 and just above the lower trend line I identified yesterday.

But the kicker is that PCR was *extremely* high. It is smelling heavy of divergence and over confidence in the market by the longs that the bottom has hit. The PCR doubled today shooting way above the 20dma. Normally, this is bullish but with the VIX itself almost touching the lower trend line, this is a contrarian indicator as history has shown with the VIX that a reversal is in the air and will happen fairly soon (within a day or two).

So, I suspect tomorrow we get another run up in the market and then a collapse either late tomorrow or Friday (or Monday). Chartists are saying 740 is the resistance and if it goes above that, big rally ahead. I would agree but i am betting that 740 does not get breached tomorrow (at the close) and will trigger the next leg down .

But alas, I can not trade in this market due to.... Oh nevermind, can't talk about it. Do your own homework and enjoy the swings. And don't forget to set some stops no matter which way you trade. You can get crushed.

March 11th - Intraday

We hit the S&P 730 and VIX 43 earlier and on queue, markets slide down.

Look for S&P to go to aroudn 700 before it returns up in anticipation of thursdays house committee meeting on m2m.

I am no longer allowed to post on yahoo boards. that is all i can say about that.

Tuesday, March 10, 2009

It's the Bottom because I heard it on CNBC

Driving home listening to CNBC over Sirius Satellite Radio, 3 raving reporters were declaring the bottom is in. They said the banks are in fine shape and will continue to go up. Tech's will rally. The uptick rule and M2M and the Citi news is all we needed to get the market started. The market will move up from here and the Dow could double within a year. WITHIN A YEAR!!! DOUBLE!!! DOW AT 14000 WITHIN A YEAR!

I heard it all on CNBC so it must be true. Would they actually call the bottom without it actually being the bottom? Surely not. They have never done *that* before.

I guess if you listen to these talking heads too much you can start to believe that the bank crisis is over. That Obama has overnight become a great president. That Geithner is suddenly a genious. The stimulus plan was exactly what we needed after all. That TARP was a great plan after all. That uptick rule will stop all short selling. That 10% unemployment is not all that bad. That weekly bank failures are no longer anything to worry about. It's all good.

I am going 100% long tomorrow on every 2x and 3x long ETF I can find. I now have no fear that the market will ever have another down day. I will be rich by August.

But why bother. I will get hit by not only higher capital gains taxes but also enter the 39% tax bracket and probably be hit by AMT, totally crushing all the luck I tripped into listening to CNBC that fateful night on March 10th.

So therefore, I will remain with my current short positions, 60% cash and bath in my Gold. That way I get a nice tax write off on my losses. Oh but wait! I can only deduct $3000 a year. Damn. that plan won't work either.

OK, enough of the sarcasm. I am amazed at how bullish people have become overnight really believing all the bad stuff is behind us. Truly amazing. We are no better today than we were yesterday. The Citi news was all about operational profits. No mark downs. No bad assets. It was not a news release. It was an internal memo. They can't go to the media and have a press conference of such news which doesn't really state their actual bottom line. Yet, the media jumped on it as gospel. The uptick rule is meaningless. Been done before and did nothing. And they have not decided to put it in place. They are just considering it. M2M is also just being discussed. There are so many problems with doing anything about it and will take quite a bit of beaurocracy to get it right.

All that said, today was a wonderful day for longs who stayed long throughout the day. Today did bring hope to the economy and I am all for that. But is it reality? I would like to think so, but I know better.

I do think this rally will continue into the morning. It has a lot of momentum. But I see this rally coming to a halt tomorrow or the next day based on the historical nature of the VIX but mostly based on TA. You can't have a move that big without a retrace.

The VIX went well below the 20dma ending a 15 day streak. It won't just bounce off of this and go back above the 20dma. It may take a day or two or longer. But what is interesting about this big move today is that with the VIX a full 3 pts below the 20dma, And the PCR well above its 20dma, this is creating a convergence situation which can soon lead to a powerful reversal.

The chart below shows the VIX and the PCR converging. It represents we are close to over optimism. It is not there yet but very close. Notice also on the chart the lower trend line. The VIX has touched this 3 times over the last 2 months and each time it touched, the next two trading days resulted in a 30-60 pt drop in the S&P. That's right, 30-60 pts within 48 hours each time.

It is not completely clear yet what will happen in the next day or two, but if I were to guess, tomorrow morning will continue the rally. S&P getting to perhaps 730. From there, the VIX will go below the lower trend line and overly optimistic convergence will kick in causing profit taking and we will see a move down. Sometime in the next day or two, the S&P slides back to the 700 range. But I believe the rally will still have some legs as shorts take some profits and probably anticipation of the M2M meeting. This could bring the S&P up to 740 and the VIX will be at the lower trend line once again.

From here, I think we have a wonderful shorting opportunity. I see yet another reversal and the VIX moving back past the 20dma continuing the current downtrend.

Watch the VIX hitting the trend line which is about 43 and the S&P hitting 725-730. Would be a signal to take profits for longs and an entry for shorts. Be nimble though since the reversal probably won't go to low. Longs taking profits will be willing to re-enter at a lower price to try again. So The VIX getting near the 20dma and the S&P around 700 may be another signal of another reversal.

I wish I had paid more attention to the options action late yesterday. It was initially a concern of mine but I discounted it and I should not have. It was a signal that we had some divergence and there were some heavy hitters in there. I hope shorts hot stops set to avoid a big loss today. If nothing else, today taught you why stops are so important. It is days like this you pat yourself on the back for setting stops.

Good luck and do your own homework. And that doesn't mean listening to the loud mouth on CNBC who reversed his bearish outlook yesterday into a full bullish mode today.


Watch for GOOG to get to 320. A super short opportunity. I will be all over the April puts at this price.

Monday, March 9, 2009

PCR Whiplash

I had said going into today that as long as VIX stays above 49, the trend downward in the market will continue and we are still on our way to a capitulation sell off. While I still feel that will happen, I have some reservations.

Late in the day there was some very heavy volume on VIX puts. The VIX PCR was around .10 (extremely low and extremely bearish) until the final few minutes of trading. There were some very large Put orders filled at the end of the day. The question is, were these one bulk naked put write orders or were they single put buy orders? I don't have that information but it does make quite a difference. They were all round lots of 1000's (10,000, 4000, etc.)

The prices on these were at the market price. Someone wanted them for sure so I have to assume these were buy orders and filled as they could, or MM's filled them automatically due to the market order condition and will balance them later.

These trades swung the VIX PCR completely around. I want to discount it because it could just be someone hedging or gambling a bit. Buy why gamble on the VIX? why not load up on something more volital?

Anyway, actions on financials were mixed regarding PCR. There is no clear indicator of being oversold or overbought at all. Therefore, there are still plenty of longs out there trying to time the market rally. They are getting beat up on every move up in the market. This game has got to be getting old for them. But they continue to jump in hoping for that recovery rally that just has not been there.

With the VIX action today, I do feel good about holding FAZ overnight. that said, at the end of the day after seeing the heavy put volume on the VIX, i did a knee jerk reaction and bought some FAS calls as a hedge. I wish I hadn't now, but I did and will unload them as soon as the market settles down in the morning and the signal is clear.

I continue to be very bullish on SRS. I have almost forgotten about my shares. No chance I dump those anytime soon. I am also bullish on GOLD. The "hyper-inflation" fears are starting to resurface. Gold will move up well before inflation actually hits us. Gold is a long term play, not a short termer.

Speaking of Gold, I was looking over my gold coins and my favorite are the Krugs. Just look really classy. The American Eagles are my second favorite due to the detail. The Maple Leaves are my third since they are very plain. Either way, I love them all because they allow me to sleep at night and they are making me money right now.

This is a wonderful market, folks. This is a once in a lifetime opportunity. We will have large swing moves coming up and if you hit it right, you could be cashing in big time. It happened in 2001 and I was on the wrong end of it. Not this time.