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Saturday, October 16, 2010

LONG POSITIONS ARE IN JEOPARDY

The stock market is now on the 34th day of its daily cycle. That cycle lasts on average about 35 to 40 days. So as you can see we are pushing the limits for a cycle top. We may have made that top on Wednesday. We'll just have to see how next week plays out.


I also think the dollar may have put in a cycle bottom on Friday. If it did then it is due for a snap back rally to relieve the extreme oversold conditions. This should pressure virtually all asset classes (the possible exception might be gold).

At the moment I'm expecting the market to begin working it's way down into a daily cycle trough possibly bottoming on the third quarter GDP report Oct. 29th.

Any one still holding long positions might want to consider taking profits here, especially if the trend line gets broken next week.


Once we get past the correction into the now due daily cycle low traders can probably re-enter long positions for a run at the April highs.

More in the weekend update for subscribers.

114 comments:

  1. FAZ is a tricky bet IMO.

    Congress will probably legislate the foreclosure problem away. You could have a rally in financial shares just on the rumor of such an event.

    Personally, I'm taking a small (15%) position in UUP to hedge against a rise in the dollar.

    ReplyDelete
  2. Yes but I'm counting on them taking longer than 10 days to recognize and fix the problem.

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  3. I would be very wary of attempting a long trade on equities even though the current cycle is forming as right-translated. There are too many ominous signs to warrant such risk. Apart from another potential banking fiasco developing around the foreclosure market, the yearly cycle low for equities has already failed, and several of the technical indicators I developed to work concurrently with cycle analysis have been giving warning signs since May.

    If the stock market DOES take off, mining shares are sure to outperform, so I'd just stick with those. Those who already have heavy exposure to miners could then consider shorting the equity market as a hedge whenever a daily cycle appeared to be topping.

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  4. Doc,

    I currently have heavy exposure to miners. Would you therefore say that Gary's trade i.e. long FAZ is a good way to hedge?

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  5. I find it validating when i get an update that suggests the trade I am prepping to open on Monday. Not FAZ, but SKF. I'm too afraid of the 3x vehicles.

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  6. Hi,

    I have recently come across your blog and find it quite interesting.

    I would like your opinion/view on a few things.

    a. Possibility of Parabolic moves in gold & silver from over the next 6-12 months. Any possible targets for them? Time & price wise?

    b. How to identify a short term (daily cycle) top in gold/silver - they look pretty good for a meaningful pullback

    c. A long term Triangle pattern in the dollar index?

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  7. I actually think the market will easily make new highs. The Fed will print even more if the mortgage mess springs another leak. And until inflation soars high enough to cripple the economy it's going to go higher. The NDX has already made new highs.

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  8. Pi,
    I suggest you get a trial one month subscription. I've answered all those question in the recent updates but it's way too lengthy to try and go into it all here.

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  9. Gary, Thank you for answering my question in the previous post.

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  10. Ra,

    I suppose that could be one way, though I'm not a big fan of the double or triple funds. Personally, I prefer selling calls on the SPX or just outright shorting.

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  11. Fubsy, why fear the 3X funds? You can put $60k in shorts of XLF. $30k into SKF, or $20k into FAZ. Aren't they all equivalent in terms of risk? Am I missing something here?

    I myself agree with Doc about avoiding the leveraged fund. They all have bad tracking errors and so tend not to use them. If you are just in for a week or two it's o.k. I suppose, but it also isn't great to use every last penny in your account all the time. If you have cash why not just short twice as much XLF or some other unleveraged ETF? I will just short XLF if I decide to trade this trade.

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  12. The triple funds are one way to get a higher return on invested capital but one has to realize these are leveraged funds and are going to be very volatile. Adjust position size accordingly (I would suggest not more than 5% in one of these).

    And only when you expect the trade to go almost immediately in the right direction and last for a relatively short time.

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  13. Doc and Gary,

    Thanks for sharing the alternatives.

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  14. The main problem with these leveraged ETFs is that they achieve the leverage via swap arrangements, so there is counterparty risk. How ironic would it be for one to buy FAZ, betting against financial institutions, only to have one of those institutions be on the other side of the swaps and fail?

    That's why I prefer to sell calls or short the S&P in the futures market. You can get your leverage without paying margin interest. You have 23 1/2 hour liquidity, and your profits are taxed as 60% long-term/40% short-term.

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  15. is not this market can go up up whit non pullback like we get in march april? and by earning season the not dropping much also

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  16. "Yes but I'm counting on them taking longer than 10 days to recognize and fix the problem."

    They've recognized the problem. When BAC's share price goes down, they notice. They call the politicians whose campaigns they finance and demand solutions immediately.

    They also don't need to "fix" the problem. All that's needed is the rumor of an imminent legal resolution and the shorts will be forced to cover.

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  17. DG,

    Any leveraged fund is drained of principle each time the underlying asset reverses direction. I'm sure you're aware of this as it is not new info. This is amplified with 3x funds over 2x funds. Simply stated, if XLF moves 1% and 1% down, Skf and FAZ will not be even. They will have a loss.

    Of course, if you catch the direction of a move, you gain % on each consecutive move in a single direction. Simply, if XLF moves 1% up, then 1% up, SKF will be up more than 4%, and FAZ up more than 6%.

    I tend to err on the side of caution. I have not traded 3x funds due to the erosion risk, and I forgore the possibility of exponential returns. That said, if I believed a move to be clear as day, I might reconsider with a small position.

    F

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  18. I would buy XLF puts instead. They are liquid and trade with a pretty narrow bid/ask spread. The Nov 16 put has pretty much zero time value and the OTM 14s are only 34/35 cents.

    Or I would maybe focus on BAC due to its Countrywide related exposure in the mess.

    But this trade might be a bit long in the tooth. I also wonder if homebuilders might be a better target?

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  19. I'm showing spreads in the neighborhood of 15% and fairly low volume.

    FAZ on the other hand has a typical spread of 2 to 3 cents anf trades 65 million shares daily.

    As long as the trade goes in the right direction almost immediately I would never opt for options over FAZ.

    I would only take this trade either in a bear market or deep in the daily cycle.

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  20. Frank,

    I'll just trade the S&P, as homebuilders are actually benefiting from the whole foreclosure mess. Would-be home buyers are looking to new construction instead of foreclosures, from what I'm hearing, and I know that in Orlando DH Horton is now able to get rid of lots of inventory that were previous cancellations being there is no question of ownership.

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  21. fusby,

    Yes, price erosion is another good point about why I don't like the leveraged funds, but rather prefer to sell calls. In fact, I sold some OTM calls on the S&P a couple weeks back when I first thought the daily cycle was ready to roll over. As of this evening, the S&P has moved 32 handles against me, but I am out only 6 handles on the options. By the time the daily cycle dives into a low, I'm certain the trade will be profitable. With options the market can chop sideways on me, and I'll be ahead. With leveraged funds, the market would be taking small bites out of me every day.

    Like Gary said, your timing has to be pretty good for those things to work for you. If you get it right, they can be pretty profitable, but I don't want the stress of worrying about perfect timing.

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  22. Hey fellas, who took my picture tis weekend? :)

    http://rense.com/

    ReplyDelete
  23. G-Train,

    When you make portfolio changes, do you have a specific system (such as time of day, or on the open) to enter/exit. Just curious if you try to "time" the entry intraday?

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  24. I will wait till the close today. I doubt the market will drop much prior to AAPL earnings report and if it can close marginally positive we might see that elusive SoS day.

    ReplyDelete
  25. I agree about the rAmPPL earnings later today, but do you usually wait till end of the day to make portfolio changes, or just try to make your best guess on each individual trade?

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  26. Just my best guess. There is no perfect entry no matter how many times bloggers post charts (after the fact) showing how they timed the exact top or bottom of a daily move :)

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  27. Hey, Ben, how'd that gig go the other night? Rockin' it out just like the Seventies, both musically and monetarily!

    http://3.bp.blogspot.com/_tEQToMzfr9U/TLtehlsTvuI/AAAAAAAAAQc/MCui6SZwkfY/s1600/17F_Elton--300x300.jpg

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  28. Tudor--
    Love the picture!
    Austrians Rule!!

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  29. Looks like the best time to buy gold is 3 a.m. central.

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  30. so much for the dollar rally. I thought a dead cat bounce would last a little longer and bounce a little higher. Just got knocked out of AUD/USD short.

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  31. Your stops are way too tight.

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  32. Anybody,
    Selling into strength:
    http://online.wsj.com/mdc/public/page/2_3022-mflppg-moneyflow.html

    Look at goog, how do I interpret the data? up/down ratio: 0.84 and tick up and tick down? Who knows the kings language???
    Is google being heavily sold as small fish buy the 5 to 10 shares at a time?

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  33. The only thing that has any predictive value is the SPYDER's. You are wasting your time watching GOOG.

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  34. 50 pip stop loss with 100 pip gain limit is reasonable I think. Should have just followed the 1 hr technical charts because they are all pointing to the USD going down

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  35. Until the dollar breaks below last weeks intraday low I would assume that the dollar cycle has bottomed. Your stop should be under last weeks low. I suspect your position size is too large to allow a proper stop.

    You need to adjust your position size so you can use proper stops.

    ReplyDelete
  36. regarding position size on foreign currency trades, if the size of the futures contracts require you to keep your stop too tight, then try trading ETF's. EUO is Euro double short. UUP is long US Dollar. There are ETF's for most foreign currencies, FXA for Australian dollar, FXE for Euro, etc.

    The ETF's do come with a downside, though: They don't trade 24 hours a day like currency futures.

    ReplyDelete
  37. Not that I recommend the trade but as I write the bid/ask on Nov 15 XLF puts is 0.68/0.69 and Nov 16 is 1.49/1.52, which is also zero time value for the latter.

    It doesn't get much better than that, and sure beats monkeying with FAZ.

    ReplyDelete
  38. I posted Last week that TLT was way too overdone. I have raised my stop to break even now. Previously posted SMH short also acting tame. Dow is up but lots of the market looks awful, which is typical action before a drop. Under normal circumstances I'd be adding to shorts here, but Fed nonsense has me back on my heels a bit, and I am only short about as much as I am long PM's. Glad to see FAZ down...I may follow you, Gary.

    N1tro: 50 pip loss with 100 pip gain limit is not enough information, IMO. Unless you have reason to believe the $ will stop at a specific point (trendline?) you can easily get shaken out because of volatility. You can be both long and short and get both stops hit in 10 minutes. If you play with tight stops (as i do) entry points are everything. Did you have a clear entry point and reason for entering the trade at some specific moment? If so, I'd love to hear it if it is consistently predictive. Gary's definition of "proper stops" is much wider than mine because of this entry point questions and his belief that entry point timing is too difficult to do well. I have not been in the hole for more than 10 minutes in either TLT or SMH.

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  39. I picked up some FAZ on the open and may grab some more later like Gary is sayin in a update .
    Jake

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  40. I shorted the AUD/USD last night based on the fact it broke the 1st support level and the chatter last night was USD strength, blah, blah, blah... I play using the 1hr or 4hr charts. You win some and you lose some. Important thing is to win more than you lose.

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  41. As long as you win big you can lose more than you win :)

    I was assuming you took a long dollar trade based on the possible daily cycle low.

    If that was the case then the only way that trade could be negated would be a move to new lows. Thus your stop would have to be below last weeks intraday low.

    If you are just day trading based on hourly charts then that is a whole differnet ball game, and the daily cycle data is pretty much irrelevant.

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  42. Thanks n1tro...that explains it.

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  43. I'm playing gold and silver based on daily cycles and the fact that the USD and most other currencies are pretty much screwed. The hourly currency trades keep me from being bored :)

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  44. Gary, will you take your short @ end of day even if a bug SOS does not show up? Or do you wait until tomorrow? I believe BAC reports tomorrow before bell.

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  45. Gary,

    Are the SPYDERs the net difference between SoS and BoW (that you can see on the WSJ site)?

    If not, can you explain what they are and how to track them?

    Thanks,

    Robert

    ReplyDelete
  46. Nick,
    Yes I will take the trade based on my belief the dollar has bottomed and this will soon drive the market down into the daily cycle low.

    Yes I'm just looking for a day when we see negative money flows out of the SPY ETF.

    ReplyDelete
  47. Gary,

    Wondering if you look at the natural gas market at all. It's at an extreme low, maybe lots of potential for profit? I am tempted to buy it but it doesn't stop going down and I worried that at best it might move sideways for an extended period.

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  48. Starting to get a bit of an SPX coil working.

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  49. Right now we're at -7.52 mil for the SPY money flow.

    What total negative amounts are you looking for over time to precede a daily cycle low?

    Also would negative money flows in the iShrSP500 (IVV) act similarly?

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  50. I would avoid nat gas. Apparently the oversupply problem is going to trumpo the dollar weakness for who iknows how long.

    Robert,
    I would like to see at least -100 million.

    ReplyDelete
  51. Last question,

    How many days does it typically take for the negative money flows in the SPYDER's to reach -100 million or thereabouts (1-day, 3-day, 5-days, or what is a typical range)?

    ReplyDelete
  52. Yeah - does look like a coil to me as well in the SPX.

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  53. I'm looking of one day where smart money sells into strength.

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  54. What a boring market.

    Everyone just waiting on AAPL? Or that is their excuse...

    Another up day tomorrow with nice SPY SoS? That's what it feels like.

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  55. Gary: now I'm a little confused. Are you going to buy FAZ at the close today regardless of the SoS you want, or will you wait to buy it until you see some large SoS SPY numbers?

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  56. I will buy either way. I would like to see SoS but it doesn't always show up. It didn't prior to the last daily cycle low.

    The only time one can truly depend on it is at intermediate tops and I don't think this will be an intermediate top so we may not get the SoS here.

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  57. gold has a decent SoS today...been a while since I've seen one for gold

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  58. Gary,
    Are you still holding a core position? Have you eliminated all your margin? If so, what % of your portfolio is in cash? Will you sell more and add to cash position when you see smart money sell into cash?

    ReplyDelete
  59. Gary,
    paulson's big holding BAC,C..you want buy fAZ against paulson?

    ReplyDelete
  60. FH,
    My positions are always published at the end of every weekend report.

    oa92000,
    Only for a short term trade because the market is due to drop down into a daily cycle low anytime now.

    ReplyDelete
  61. I show "strong market" conditions again on the QQQQ's. So far, the S&P hasn't shown the "strong market" conditions today, but usually either one is enough to alert you to modify sells.

    I don't take sell signals under these alerts.

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  62. I'm not trying to time the "perfect" entry. I'm basing this trade (small) on the fact that we are getting very late in the daily cycle. It looks like the dollar may have bottomed and sentiment levels have reached extreme levels.

    Under these conditions the trade should be a winner even if I don't spot the exact top and even if I have to hold through a drawdown for a bit before it starts to head in the right direction.

    This is why one must control position size. If you do that then it's easy to hold the trade until it works. If you bet too big then you must time the trade perfectly or you won't be able to hold on.

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  63. 77.0 appears to be a short term resistance/support level. The $ has now fallen below that and below Sunday's low.

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  64. It would have to fall below 76.14 to negate what I think will turn out ot be the cycle low. BTW today completed the swing low.

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  65. Perhaps AAPL is what takes into the daily cycle low. $4.05 per share seems a bit rich to me and I haven't seen a single bearish analyst today

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  66. MSFT, INTC looks like value here..

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  67. G-Train,

    What sort of stop will you use on the FAZ should it not work out?

    ReplyDelete
  68. I don't know if it is rich or not, but a 33% run in a month and a half has probably already discounted a great earnings report.

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  69. My position size is small enough that I can just wait till the daily cycle comes. But if one wanted to place a stop on the trade they could probably use a close above 48 on the BKX.

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  70. Market way overbought to where the dxy is IMO. This tends to happen prior to corrections. Same will happen at the end of the correction, way oversold based on dxy. Sell off imminent.

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  71. Anybody care to comment on why the miners are down today? The market is up handsomely and the physical's are up. Curious.

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  72. Miners might be snuffling out that correction that's on everybody's mind. They can (though not always) lead the action.

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  73. According to Bob Chapman the miners are down because of "Naked Shorts" from the PPT.

    I more or less think many are aware of a correction in gold/silver imminent therefore the miners are being sold/shorted.

    The dollar has most likely bottomed and yet the stocks are still stretching upwards- this is very close to the end of the few month run.

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  74. Market tanking after hours. AAPL's earnings were only great, but not god-like, which is what was bakled into the price. I've been adding to my shorts since Thursday and have started to wonder whether the would ever break...usually a good sign. Gary, for the first time in my memory you, Jason, and I are all on the same side (so they'll probably open up 150 tomorrow, eh?) Did some XLF in the after-market right after AAPL announced, on your read, Gary.

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  75. Are you psychic? FAZ is moving up after the bottom close. Sheesh.

    ReplyDelete
  76. Yep, AAPL getting pasted won't help the QQQQ's tomorrow. Of course, last night, I was looking at the dollar "soaring" and everything else down. Overnight S&P futures are next to worthless or if anything are a contra-tell.

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  77. Overnight futures tend to stick when reversing off extremes and in the fact of surprise news. The market has been up a ton and AAPL disappointed, so I bet we are well down tomorrow. Doesn't mean it has to be, but the post-close sell-off is not contra anything in such circumstances, IMO

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  78. Gary,
    Where should I put my sell stop on FAZ? Can I use 12.34 or is that too tight? Currently I have it at 11.81.

    ReplyDelete
  79. "NYSE Euronext Cancels Trades of S&P 500 ETF at 9.6% Below Opening Price"...

    "The ETF plunged 9.6 percent over eight seconds as 7.2 million shares traded on NYSE Arca, according to data compiled by Bloomberg."

    Spotting SoS days in the SPYDER's may have just gotten all the more difficult :)

    http://www.bloomberg.com/news/2010-10-18/nyse-euronext-cancels-trades-of-s-p-500-etf-at-9-6-below-opening-price.html?cmpid=yhoo

    ReplyDelete
  80. Todd,
    I'm going to go over that in tonight's report.

    ReplyDelete
  81. there was large S.O.S. #'s today for aapl -131.29
    I'm not surprised to see aapl getting pasted in the after hours.

    Turning to gold, it went down to 34 points from Thursday's today high before closing up 15 points off the low.

    Do you think we just saw the correction or are you anticipating more?

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  82. I'll cover it in tonight's report.

    ReplyDelete
  83. Gary,

    We got a mini-crash in SPY after hours. I don't think these things have anything much to do with lack of put buying.

    They are caused by the lack of volume coupled with the high frequency traders and the odd misplaced order.

    A little of this can go a long way in turning market sentiment in a hurry.

    ReplyDelete
  84. I'm showing a drop of .5%. That's hardly a crash. The print on stock charts is obviously a mistake.

    ReplyDelete
  85. Gary,

    Here's the link:

    http://www.bloomberg.com/news/2010-10-18/nyse-euronext-cancels-trades-of-s-p-500-etf-at-9-6-below-opening-price.html?cmpid=yhoo

    ReplyDelete
  86. Gary,

    A 9.6% drop over 8 seconds qualifies as a mini-crash.

    ReplyDelete
  87. It was obviously a mistake and not true market action. The only thing that could trigger a move like that is some kind of shock news event or a rally that lasted long enough to skew sentiment to such a bullish extreme that put buying dries up, similar to what happened in May.

    ReplyDelete
  88. I think the point is that it did happen regardless of reason. I think more of this is going to happen because the markets are not prepared to deal with the HFT's.

    And a little of this can effect sentiment in a big way in a big hurry.

    ReplyDelete
  89. Daniel,

    Over 70% of the total volume is now provided by computer driven programs, most of which are designed to move trading rapidly in one direction.

    These traders are referred to as High Frequency Traders (HFT).

    ReplyDelete
  90. MOPE (Management Of Perspective Economics)...

    "TOKYO, Oct 19 (Reuters) - Treasury Secretary Tim Geithner said the United States would not engage in dollar devaluation."

    Dollar short covering time. All signs point to daily cycle low.

    ReplyDelete
  91. hahaha He's such a lying sack of ****.

    ReplyDelete
  92. I have a hunch that the gold/silver correction into the daily cycle low will be severe enough for many that recently got in and took on massive leverage to be wiped out.

    Check out the COMEX volumes today, over 200% of normal. With so many piling in right now if the big big boys come out with some major shorting power they will be massacring like its Wounded Knee all over again. This will alleviate a headache that is caused by the physical metals being in relatively scarce demand.

    Time will tell...

    ReplyDelete
  93. Comex vol today was perfectly normal.

    ReplyDelete
  94. You can look at GLD volumes as a proxy for Comex also. They tend to show equal proportions most time. Like the Comex, GLD and SLV volumes were also normal.

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  95. Thanks TZ. I was mistaken, Harvey Organ had commented the very unusually high volume occurred of Friday.

    With so much global liquidity being created it is hard to see a steep correction, especially in gold and silver, but short-term I think anything is possible, but long-term we all know where things are headed.

    This Gold bull is not easy, that is for sure. The only way to make it nonchalant seems to have very little leverage and then ignore it until its high enough so that you say, "oh shit". I'm going to try and keep my mouth shut until $5000.

    ReplyDelete
  96. Organ also seems to talk a lot about large silver withdrawals, but the CME silver warehouse inventory has been in the 50mil (registered) range for a long long time.

    http://www.cmegroup.com/trading/energy/nymex-daily-reports.html
    (bottom page)

    Suffice to say I don't concur with or understand Organ's comments on these topics. Maybe I'm missing something from his angle.

    ReplyDelete
  97. For all those who still believe the charade that no one can manipulate the markets:

    http://www.zerohedge.com/article/visualizing-pomo-market-how-fed-added-400-points-sp

    Explain that one.

    ReplyDelete
  98. Is Troll Boy trying to justify his massive losses over the last few months?

    If the market is fixed to the long side as you believe, then what were you ever doing short?

    ReplyDelete
  99. TB,
    I'm not going to stand for rudeness anymore. If you want to make a statement that you aren't short that's fine but you are going to leave out the derogatory comments from now on if you want your posts to stay.

    ReplyDelete
  100. But this is ok in your book?

    "Is Troll Boy trying to justify his massive losses over the last few months?"

    ReplyDelete
  101. All you had to do was deny that you were short. There was no call for the G-string comment.

    ReplyDelete
  102. Just so I know the rules going forward and am willing to follow them - it is ok to speak un-truths about someone but only refer to their fake name they have registered - just don't call them another fake name?

    I'm game if that's the rule.

    ReplyDelete
  103. You know exactly what I'm talking about. As long as you are civil then your comments will stay up.

    Contrary views as always are welcome.

    I'm just not going to let the blog sink back down to the name calling mess it was last month.

    ReplyDelete
  104. I agree Gary - but I think you need to protect the sanctity of speech of everyone, even those you may not like.

    My post was nothing personal about the POMO - yet Ben Bernanke makes it personal and picks a fight. You shouldn't be ok with that kind of post either.

    ReplyDelete
  105. If he had called you some derogatory name his post would be erased too. But I'm not going to erase a comment because someone makes an assumption that may or may not be true. It will be upp to you to refute his claim. But you will do it in a civil manner.

    My gosh it's really not that hard to do. I do it every day.

    ReplyDelete
  106. I can do that - but you know full well what his intentions were.

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  107. Yes but I'm not going to regulate someones intentions as long as they don't resort to vulgarity.

    ReplyDelete
  108. Since when is a g-string vulgar?

    Especially to a guy who lives in Vegas?

    ;)

    ReplyDelete

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