FAST PROFIT TRADES

Market Looks for Its Knight on A White Horse

It’s been about 5 weeks since my last post here.  During that time, I’ve been watching the deterioration of the stock market, and have made some money from calls on SDS, which double shorts the S&P 500.

The headlines on CNBC.com tell it all:   “Dow, S&P Log Worst Thanksgiving Week Since 1932″, “Gold Set for Second Weekly Loss, Technicals Weigh”, and “Asia Ends Lower on Europe Deadlock”.

Below is the current chart of the S&P 500.  You can see that it closed at its lows on “Black Friday”, an ironic coincidence.   You can also see that it has been down for 7 consecutive days, which is really quite rare.  This latest downturn bears a close resemblence to the one we had at the end of July.  That one went from 1350 to 1125, almost a 17% drop.  If the current decline is of a similar nature, that would bring us all the way down to about 1054! 

Why it Pays to Enter a Position in Two Halves

I truly believe that the most difficult part of trading is not the what you buy, but the when you buy it.  Often we do our chart analysis, and reach a conclusion that it’s time to make a trade.  But how do you maximize the effectiveness of your timing?

Well, one way to hedge against being too early on a trade is to cut your allotment in half and make two trades instead of one.  I did this the other day, and it paid off nicely for me.  On October 18, sensing that the Nasdaq was becoming overbought and weakening, I bought November 19 QID calls at 2.85  (QID is an exchange traded fund that double shorts the Nasdaq 100). 

About a half hour after I made my purchase, and with my position basically flat, it was announced in a British newspaper that Germany and France had agreed to boost a euro zone financial rescue fund to two trillion euros ($2.76 trillion).  This was more rumor than fact, but it nonetheless caused an immediate panic buying reaction in the U.S. stock market.

Stocks blasted higher over a 15 minute period, pushing QID down from 44.65 to a low of 43.50 (about 2.5%) in only 15 minutes! My call options of course, were crushed.  Before I knew what had hit me, my options were down to about 2.30!  (See two day chart of QID below)

                                                                                   Chart courtesy of bigcharts.com

 But I have learned from much experience that you don’t panic in those situations.  If nothing else, the Nasdaq market makers have just bought an awful lot of quickly dumped stock that they will need to get rid of at higher prices.  As they push the bid/ask spreads higher, the stocks will climb back, and at least retrace a portion, if not all, of the panic trading period.

 One way to really take advantage of this is to buy the second half of your position following the meltdown.  But you must ensure that there are signs of stability, so that you are not simply “catching the falling knife” and about to lose even more money.

 Signs of stability will include candlestick figures such as a Doji or hammer, along with some decent sized volume on the first upside bar.  But you have to react quickly, or you won’t derive the benefit of buying near the bottom.  Stocks can rebound in a NY minute, as they say.

 So I bought the second half of my position, at 2.35, and watched intently as the QID wiggled higher.  We were near the closing bell, and I was hoping we would get out of Dodge without another wave of buying.  But not to fear, after the initial panic buying, a sense of calm had returned to the markets, and they were now shrugging off the news out of Europe. 

Perhaps they were now getting wind that the news was unconfirmed, or maybe the news had already been “baked” into prices.

 By the time the closing bell rang, QID was at 43.97, my calls were back around 2.55, and I was much relieved.  I was closing the gap on the loss of my first half position, and was making a profit on the second half.  Right before the bell, the Nasdaq was getting beat up pretty good, and that was an excellent sign of what might come the following day.

The next day (yesterday), the Nasdaq gapped down on the opening, following Apple’s (AAPL) earnings report.  That meant that QID was gapping up, to about 44.40.  Soon thereafter, I sold my 2.35 calls at 2.70.  I could have held the position longer, but I like to take my profits when they are ready for the taking. 

Still holding a small loss on the original position, I held onto my 2.85 calls, sensing that we might get a much weaker Nasdaq market today.  The gap up on QID gave me additional confidence that it would go higher later on in the day.

No point in taking a loss when you still feel that you are on the correct side of the trade! 

I was right, but it took awhile for it all to shake out.  QID traded sideways for much of the day before beginning a rally around 1:30 that would eventually take it much higher.

I sold my 2.85 calls a little bit after 2 PM at 3.25.  The total profit before commissions on both positions was over 14%, not too shoddy for less than a 24 hour period.

As usual, I sold a bit too early.  However, I maintain that it’s far better to give up some additional gain than it is to give back a nice profit.  So I’m happy.

Lessons learned:  1)  Never panic and sell at the lows.  2)  It often makes sense to cut your money in half and buy your options in two separate purchases.  The additional commissions are chump change when compared to the additional money you can make by buying the second half position even cheaper.

And if you happen to be correct in your first purchase, and the call increases in value, you may not have made as much money as you would have by buying all the shares at one time, but at least you are still making some money.

And that’s what Fast Profit Trading is all about!

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S&P at a Critical Juncture Again

Before I get into my analysis of the current status of the S&P 500 index, I would like to take a moment to apologize for my recent 17 day absence from the blogosphere.  I took on a very large real estate project, and it has kept me extremely busy over the last few weeks.  I hope with this article, to get back into a more regular writing schedule.

Regular readers of this blog know that I have been bearish for several months.  In fact, I had a very large long position on the S&P 500 that I moved into cash at the very end of June.

I see the S&P 500 at a crucial juncture right now.  After the last decline, which brought the index back down to recent support levels at 1100, we saw the S&P kick back up to the 1160 area this week, on decent, if not spectacular volume.

And after three consecutive days of rally, it was inevitable that we might pull back on Friday, especially with another tepid jobs report coming out.

We didn’t get a huge sell off, because the 103,000 non-farm jobs created last month beat expectations by a large margin.  However, if you looked more closely at the numbers, over 40,000 of those “newly created jobs” were Verizon employees returning to work after a strike.  If you take that number out, the non-farm payrolls were pretty close to expectations.

Take a look at the chart of the S&P 500 below.  Do you see the declining 50 day moving average (blue line) just above the current 1155 level?  Since August, that has kept the index moving lower, and acted as overhead resistance on any rally attempts.  

Once again, coming up to the declining 50 day moving average...

                                                                                                        Chart courtesy of stocktrades.com

Also, if you look closely at the 200 day moving average (red line), it  appears that since mid September, it too is beginning to decline.  That would indicate a longer term bearish period is ahead.

Furthermore, look at the recent lows.  On several occasions, the S&P held at 1125, with one occasion in early August reaching an intra-day low of 1100.  Now, while many technical analysts minimize the importance of intra-day lows or highs, it is interesting that we had two consecutive days recently in which the low for the day matched or slightly exceeded that August intra-day low. 

And on the second day, the index actually dropped to a new intra-day low of 1075!

Also note how the 14 day RSI has rolled over around the 50 level the last FOUR CONSECUTIVE TIMES it has reached there.  Will Friday’s small pull back continue that trend, and if so, will the S&P 500 fall below recent support levels?

It would not surprise me to see that happen.  Oh, I could make a slightly bullish case, by saying that the MACD seems to be on the verge of a buy signal, and after a couple of declining peaks, the stochastic has moved a tad above the last peak level.

But to be fully convinced that the bulls are back in force, I would have to see the S&P 500 rise above the declining 50 day moving average, and stay there for awhile.  Even the flirtations above the 50 day back in July were short lived.  I would also want to see the MACD rise above the zero line for confirmation.

So for now, I’m sharpening my pencils, looking for possible Puts to trade, and hope to have some recommendations coming soon.

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Economic Woes Pale Next to More Bailouts

This morning the stock market is up for the fourth consecutive day, despite a rash of poor economic news before the opening.  Simultaneously, we had a bad weekly jobless claim that was below expectations, a bad CPI report of 0.4% in August (oh, but CNBC spun it to say it was “improved” over July’s 0.5% hike), and a decline in manufacturing for the fourth consecutive month.

Sounds like a day when the Dow should open down 150, right?!

Wrong!  ECB and the Fed to the rescue once again.  As CNBC.com reported, 

 “Stocks were higher Thursday following news that major central banks across the world agreed to lend U.S. dollars to European banks, taking pressure off funding issues across European banks.”

Whoopie!  Haven’t we seen this scenario reenacted time and again?  Bailouts for European countries remind me of the self-absorbed teenager who blows all of their allowance, and then goes to Mom and Dad one more time for that quick advance on next week, or next month.  Or in the case of the U.S., the advance is due to be paid back by the teenager’s future grandchildren!

And as always, once our teen gets their hands on that fresh new $20, it’s off to the mall to blow it again as quickly as before.

So, let’s take a quick look at the S&P 500, following this morning’s market rise:

Like a teenager off to the mall....

What Goes Up….Must Come Down!

A little over a week ago,  I told you about Beacon Roofing Supply (BECN), detailing how I bought call options with the hurricane about two days away.  I made a quick 16.6% profit on that trade, and then waited for the political hysteria of the Northeast to die down before entering another trade.  BECN went up about 25% on its move from $15 to $19 before the signs of a top began to emerge. 

And then with Hurricane Irene poofing out over the Atlantic, it was time to reverse roles, and buy several PUT contracts on BECN.

Late Tuesday afternoon, I bought the October 22 puts, at 1.90, and again sold them late afternoon yesterday at 2.40, for a 26.3% profit in less than two days!

And of course, since I frequently sell too soon (those reading this blog may choose to hold my positions longer, I just like taking the profits sooner, thus the name of my site), BECN dropped some more today, with the Put going higher this morning than where I sold.

But who cares?

So we’ll let the Put ride out some more, as the general market blow down on bad jobs news continues, because off in the distance looms Katia, with the potential for some sweet call option profits after Labor Day….

A quick look at the BECN chart:

What goes up, must come down!

The “Candyman” Gave us a Toothache!

This is an update to my recent blog about the “Candyman” (Bernanke) bounce, the bullish oasis we saw for a few days, in between violent daily crashes of the market.

I am pleased to say that I rather quickly closed out my Call on SPY with a 6.5% gain.  By doing so, I gave up some additional profit, but I really was afraid to stay too long at the fair, and I’m glad I cut the trade when I did.

So what now?

Well, there seems to be two modes of thinking.   The first is that we are heading for another recession, and the bears are fully in control.  There is ample support for this theory, including a long column of O’s on the  NYSE bullish percent index:

                                                                Chart courtesy of investorsintelligence.com

In addition, yesterday’s big loss created what is popularly known as the “death cross” for the S&P 500, in which the 50 day moving average crosses below the 200 day moving average.  This is the opposite of the “golden cross”, where the 50 day moves above the 200 day M.A., and is extremely bearish.

So is there a bullish argument to be made?  Well, the VIX was up 20% yesterday, and will probably climb higher this morning.  On a SHORT TERM basis, it is getting extremely overbought.  Ditto for all of the inverse ETF’s, such as QID, DXD, and SDS.

So  what I’m saying is you can try trading for a short term bounce today by buying PUTS on VXX, or calls on QLD.  But this strategy is NOT for the faint of heart, because it is difficult to say with any authority whether we are sitting on the mother of all market crashes right now, as I write this.

The other tricky trade is going short, or buying PUTS on the general market or individual stocks and ETF’s, because the market is already down a lot from yesterday, and could open signficantly lower this morning.  As I am writing this, the Dow futures are down 140.

Ideally, what we want to do is trade the extremes, not try to catch the falling knife as the indicators are heading lower.  The RSI and stochastics rose above oversold levels during the Candyman bounce period, but have now turned lower. 

So for swing traders,  I would certainly wait for the indicators to get back to oversold levels before initiating any long positions, while shorter term daytraders may be able to play a bounce in one of the long index ETF’s as early as today or perhaps Monday.

Either way, cash is still king right now, so make sure you have plenty of it on the sidelines.  The oil stocks were absolutely destroyed yesterday, and I will be watching for a short term bottom on those today.  But there are no specific recomendations as of yet.

Stay tuned!

Bear-Ly Alive!

The bull run which began in March, 2009 is now Bear-Ly alive!  As I wrote last week in this blog, Billy the Bull is done, and maybe even buried. 

In that blog I wrote that you should lighten up on your longs and even consider buying the inverse ETF’s.  Those who took my advice profited handsomely on Thursday, when the Dow sank 512 points, and the Nasdaq and S&P were also trounced.

But I’m not here to say, “I told you so.”  Well, ok, I did tell you so, lets get that out of the way.  So where are we now?  What do we buy/sell/hold now?

Well, last night S&P downgraded the U.S. credit rating from AAA to AA+.  Doesn’t sound so bad, right?  Getting simply an A+ in school would have been terrific, right?

Well, it’s a disaster, and it remains to be seen how the markets will take it on Monday.  But one can only surmise that the reaction will be anything but dancing in the street.

So what should investors do right now?  Get your cash on the sidelines, continue to hold your inverse ETF’s, and wait for the blood to stop running in the streets before you dare go long on another stock.

On Friday, I was going through a number of charts, hoping to find something that looked like a decent Call option play.  After an hour of seeing one dismal chart after another, I just gave up.

What was making it difficult was the roller coaster ride the market was taking, with the Dow up 100 one minute, down 240 the next, and finally ending up 60.  Unfortunately the Nasdaq was lower and the S&P flat.

It was a great day for aggressive traders to make a ton of money, and some of them did.  But it was also a day for other less fortunate traders to get knocked upside the head.

If we get a huge sell off on Monday, it could put in a temporary bottom.  For those with long term horizons, and some disposable income, it might be a good time to add to 401k and IRA plans.

But the technical damage that’s been done so far, with the S&P slicing through the 50 and 200 day moving averages, and then sinking below long term trend lines, makes me think that we still have more downside to go.  And the weekly chart of the Nasdaq Composite below, looks abysmal.  In one week, the Nasdaq managed to give up several months worth of gains:

RSI and Stochastic are dropping, and the MACD looks terrible

                                                                               Chart courtesy of stockcharts.com

One final word.  As is their custom when the market gets bearish, CNBC has been trotting out the usual old school analysts to try to calm the masses from bolting to the sidelines.  You know, the old gray haired guys with their “don’t panic, stocks are now cheap, look for opportunities” drivel.  They will tell you how each time there has been a 10% “correction”, the market was higher 3 months later or 6 months later.

Perhaps that’s true, but it doesn’t mean you can’t get out and get back in six weeks from now when the selling madness has abated.  I’d gladly trade a few round trip commissions for being able to buy back the same positions another 10% cheaper.

These guys will tell you to buy Coca Cola and Philip Morris and all of those great stocks paying 4% dividends, because they are “safe”.  You want to know what “safe” really is?  “Safe is buying Coca Cola and Philip Morris at the end of a bear market, when the dividends are 7% or 8%, or even higher.

But what happens near the end of the bear market is these same idiots will caution you that the high dividend yields could be cut.  Sometimes that’s  true, but more often the yields are not cut, and when prices rise, all of that talk is forgotten.

The bottom line:  Don’t believe any of the opinions that you hear on television.  They are just a bunch of guys trying to suck you into staying at the casino called Wall Street for as long as possible while the house has the advantage. 

Remember, in April, they were telling Joe Mainstreet how high the S&P could go, while the big players on the sidelines were getting ready to dump their shares.  Do you think it’s just a coincidence that the Dow was down 512 on Thursday and the S&P rating was cut on Friday night?

Keep your powder dry, folks, and be ready for what is coming next.

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Bull Market? Bull bleep!

Today’s action ought to put a little fear into the hearts of bulls everywhere, and indeed the 13% rise in the VIX today portends more than just a little fear.  The chart of SPY took a real pounding today, gapping down on heavy volume, with a bearish engulfing line thick enough to cut with a knife that effectively knocked four positive days on their butt.

In addition, SPY put in a MACD sell signal today, and dangled just a bit below the 50 day moving average.  So things are not looking too good right now for Billy the Bull!

Stabbing the Bull

                                                                                  Chart courtesy of stockcharts.com

You can also see on this chart that the last peak failed to reach the level of the previous peak in early May.  I would not be long in this market until and unless we are able to surpass that previous high.

So lighten up your long positions, especially if we get a bounce tomorrow.  More aggressive traders may want to initiate PUTS on  SPY, or else simply buy long positions on SDS, QID, or DXD.

I think the only thing that can prop up this market right now would be if the dolts in Washington can reach agreement on the debt ceiling.  And even that might only give us a short lived bounce.

Bull market?  Bull bleep!

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How to Make Money When the Fed Speaks

It’s always tricky to trade on the day when the Federal Reserve meets, or when the Chairman of the Federal Reserve is set to give a speech.   Such was the case today, when Ben Bernanke was scheduled to give a speech shortly after 2 PM.

Almost always, the market will trade relatively flat for the entire day before the Fed event, and it is really difficult to find a good trade.   However, during the speech, the market will generally begin to move, and the trader can take advantage of this by setting up in advance for a “Fed Speak” day trade.

The chart below shows the one day chart of SPDR S&P 500 (SPY),  the ETF that mimics the S&P 500 index.   As you can see, SPY was doing very little prior to 2:15 PM when Bernanke began his remarks.  But look what happened thereafter:

Bernanke speaks and the market drops

                                                                                               Chart courtesy of yahoo finance.

Conversely, ETF’s that short the S&P 500, such as SH, went up from 41.68 to 42.03 from the start of the remarks, through the end of the trading day.  More aggressive traders can trade SDS, the ETF that double shorts the S&P 500.

This was actually a mild move, compared to how the market can move when something more important, such as an interest rate rise or fall, occurs.  It was as if the market was not thrilled with the Fed’s comments today, but there was nothing Earth shattering that would move the market more substantially.

Nevertheless, the astute trader can take advantage of Fed Speak movements by setting up their trading platform in advance, putting in an order to either buy or sell short one of the major index ETF’s, and then just standing by with fingers ready to submit an order as the market begins to move.

Make sure your computer is near your television, so you can watch the announcement live on CNBC or another financial channel, and make sure you can see the streaming index prices.

But you must be quick, and put in your order as soon the instant the market begins to move in one direction or the other.   Otherwise, you will end up getting your order filled after a few agonizing moments, and most likely at a price you didn’t want.

I have seen stocks spike up or down 2% or 3% in a matter of 10 or 15 minutes after a big Fed announcement.  Even by catching half of that move, you can do quite well.  But be prepared to sell into the spike.  Do not hold the position overnight, because it’s very likely that the market reaction will create an extreme move that could likely reverse in the morning.

And never expect the market to continue moving higher after it spikes up within a few minutes.  Sell into the strength, and wait for a pullback if you want to re-enter a buy position.  Conversely, if shorting, cover your short, and wait for a bounce higher before entering another short position.

Final word:  Never try to outguess the Fed or the market prior to the Fed event.  If you guess wrong, you could lose your proverbial shirt in a very short period of time.

The Market Always Gives You a Second Chance!

So many times I hear traders or longer term investors lament that a stock or ETF got away from them.  They just couldn’t pull the trigger for whatever reason, and then the stock took off, and now it’s too  expensive to buy.

A lot of times this is just plain bad thinking.  A stock that takes off is showing good relative strength, so why not just wait for a pullback (so as not to buy the overbought indicators-see my last post), and then get back in.   Does it really matter that you are paying $6.50 instead of $6.10 if the stock goes to $8 or $9?

Anyway, sometimes as a trader/investor, I might get into a position too early or sell too early.   The early buy is usually worse than the early sell, because when you are too early, you have to sit with the position while it drops lower, waiting for the turn around.  And then you risk the stock hitting your stop, or your own mental anguish causing you to sell at the bottom.

Nothing is worse than selling a couple of pennies off the bottom, and then watching the stock rocket back up.

Now most people regret selling too early, because it pains them to see their stock or ETF or mutual fund tack on another 5 or 10% after they’ve sold it.  But to me, it’s not really such a big deal, because the market always gives us a second chance to be heroes.

I was reminded of this today as I looked at the chart of the AIM Asian Growth Fund(ASIAX), a Pacific rim mutual fund that I sold back in March at $30.11 when the RSI was overbought.  So imagine my surprise when it proceeded to climb up past $32.25!   How dare this mutual fund go against my call?

Well, the reason that I don’t sweat selling anything too soon is because a profit is a profit, and one can usually take their profit and look for another position with more meat on the bone.  And the other reason is that I know that sooner or later, like a hungry cat that has disappeared for a day, it’s coming back to me anyway.

And so it is with ASIAX, which this morning sits at $30.56, its once haughty RSI now looking rather pedestrian at 37.  I knew you when you were over 75, RSI!   So don’t come crawling back to me now, looking for sympathy.

So what’s the deal now with ASIAX?  Is it worth a buy?  I say not yet, and I will put it on my ever growing list of stocks, ETF, and funds to watch.  Here is the current chart:

The Cat Has Come Home Again...

                                                                                                 Chart courtesy of stockcharts.com

As I’ve noted before, the negative divergence of indicators vs stock price is very frequently a tip off to an impending reversal.  Even as it climbed above $32 at the beginning of May, ASIAX was making a lower high on the 14 period RSI.   The subsequent decline was a fait accompli at that point.  Since then it has dropped about 5%.

Although it may appear like the price and/or RSI is rounding out, suggesting a short term bounce, there is nothing but troubling news from the Pacific rim today, and the Hang Seng Index has finished down once again.   The 200 day moving average looms just below the current level at 29.57.   If it’s going to bottom, that may offer a better entry point.

So I am in no hurry to forgive this hungry cat just yet.  The lower lows and lower highs are certainly off-putting, as is the direction of the MACD and Stochastic.  But I will keep my eye on it, and certainly give my readers the heads up when I am once again feeling more benevolent towards it.