Trade Triangles And A Market Reversal

It's been a busy week for me, with work keeping me on the road most of the time. The market also turned as volatile as I have ever seen during that period of time.

So what the heck is going on?

I could talk to you about the current credit woes, about inflationary risks, about interest rates...

I'm not going to, though. Look back at my August 1st post, and the chart image of the S&P 500 that I posted. The graphic identified 1,437 as major support. Let's then look at the chart below, and see what has happened...

Support at 1,437 held for several days, but finally cracked on August 14th this week. My positions had been hedged, but once I saw support giving away I wanted to pare my positive delta. That's when I started closing positions, and currently hold just three.

Of those three, one is a very wide iron condor that I adjusted anticipating further downside. It currently has a very low delta and is not causing me much worry. I have a calendar spread on OIH, which has consolidated but not was wildly as the overall market. That position has a locked in, guaranteed profit so I am willing to ride out this correction and see if OIH resumes its upward trend. I also have a bull call spread on Costco, but that stock has held up fairly well and the current position was rolled into leaving me with a very limited risk of loss.

Everything else is in cash...

So, Thursday was a reversal day. That was a very wild ride, with the DJIA selling off more than 300 points during the day then covering all but 15 points by the close. The rally continued yesterday.

Is the correction over?

Perhaps. By careful, however. MarketClub still has not given us a green trade triangle on the daily, weekly or monthly charts. I would suggest waiting until you see a green trade triangle on the daily chart, before getting long the market. More conservative investors may want to wait for a green trade triangle on the weekly charts.

A lot of people were short this market. All of this buying we saw at the end of the session on Thursday may have been part of those shorts covering their positions, creating a reversal day. The DJIA was 200 points higher on Friday morning, which probably caused anyone with open short positions some pain forcing them to cover.

Are the bulls back? Maybe.

Let's make sure this rally is the real thing before we jeopardize our capital.

Let's put this in perspective. The S&P 500 is currently up 1.9% from where it started this year. If you had bought the index, you've given up most of your gains from the first seven months.

My options portfolio was up almost 40% before this correction and I've seen a 17% draw down this month. It is always when the market changes direction that you are most likely to see your losses. The difference between being up 20% versus 1.9% is in learning to avoid risks and limit any losses when they occur.

This is a very difficult market to trade or to call a bottom on, so keep your "powder dry" until you see confirmation before entering any directional trades. The trades that I currently favor right now are market neutral, vega neutral, short premium trades. The iron condor I mentioned earlier falls into this category.

Have a good weekend!

Christopher Smith
TheOptionClub.com

Stock Market Analysis - CSCO and Nasdaq Push Market Higher

Cisco Systems (CSCO) helped send stocks soaring yesterday. It was the Nasdaq that lead the market, gapping up at the open and continuing to rise during the day. The Nasdaq index rose 2%. The NYSE composite jumped 1.5%, the S&P 500 1.4% and the Dow industrials 1.1%. The small-cap S&P 600 bounced 1.5%.

Volume swelled across the board. The Nasdaq's total of 3.68 billion shares marked its second-biggest reading of the year, trailing only the most recent quadruple-witching day June 22. Cisco added about 110 million shares to the Nasdaq's tally, vaulting 7% on nearly four times average trade. Cisco's breakaway gap left the stock at its highest point in 6 1/2 years.

The market's big gains were an encouraging sign that this latest correction is concluding. Highly rated stocks have fared well. A number of former market leaders have staged robust gains in rapid turnover, returning to prominence. That kind of broadening leadership is typically a good sign for an emerging rally.

Of course, today the market is down but as I have counseled before it is important to pay attention to volume. Down days on lighter volume are a sign that the market is digesting recent gains. We can't go up every day. What you want to see is the bigger picture and look for signs of institutional activity.

Christopher Smith
TheOptionClub.com

CNBC Cramer Takes On The Fed

Cramer is on the Federal Reserve's case about cutting rates. The big question is whether things are truly as bad as he and the folks at Bear Sterns believe, or whether this correction is over blown.

Of course, for the retail investor and trader there is no real way to know. What we need to do is have a plan in place to 1.) protect our capital from undue loss, and 2.) position ourself for future profitability.

Christopher Smith
TheOptionClub.com

Analysis Of Continued Selling In The Stock Market

Many folks began breathing easier yesterday morning, as they say the U.S. markets trading higher. Those feelings of relief were torn from them and replaced with renewed concern as we saw renewed selling toward the close and the markets turned negative.

Last week, when this bout of selling began, I posted a video here on the blog walking you through some analysis of the S&P 500. I have not prepared a new video, but the analysis contained in the video still applies. It's still up so feel free to review it again, if you like. (Stock Market Correction Analysis Video)

What you see above is a snap shot of a price chart from the S&P 500, which was taken this morning. There are three blue lines, readily apparent on the chart. Those lines represent Fibonacci retracement levels, with the lower line representing a 61.8% retracement of the last impulse wave.

This bull market is an old one. It began in March 2003, and has been running the 4 years, 4 months since it began. The question that is everyone's mind is whether it still has legs left in it, or whether we are now seeing the development of a new bear market.

Either is a possibility and there is no one, including me, that can tell you with any degree of certainty which one will materialize. However, we can hedge our bets and we can take money off of the table. The name of the game is risk management.

In last week's video I talked about MarketClub's Trade Triangles, which had already flashed sell signals on the daily and weekly charts. We just had another light up on the monthly chart. These signals are not magic, but they are based upon trend following principles.

While my portfolio still has a net positive delta, I have tightened things up considerably and I have taken quite a bit of money off the table. I have seen some draw down as a result of this correction, but I am still up nearly 20% for the year. My goal is to protect those profits.

Any new positions I open under the current circumstances will be hedged with a bias to the downside. The goal in opening those positions will be to position myself to profit from further selling and to flatten out my currently positive portfolio delta. I do not intend to get wildly bearish, but I am listening to what the market is telling me and what it is telling me is that the bears currently hold the upper hand.

What's driving the selling?

I don't think it's energy or inflation, but most likely the deteriorating housing market and continuing credit woes. If housing prices are falling, this makes it difficult for consumers to finance large purchases from equity in their homes. Tightening credit markets are effecting Wall Street's ability to conduct business. The analysis could fill pages, but the bottom line to me is that it is going to be tougher for most companies to make a buck if they cannot cheaply and easily borrow money.

So, is a new bear here? I don't know. My advice is to continue listening to the market and watch for developing trends. The preliminary information that we have since this correction began is that we're seeing a shift in both short and long term trends.

Trade well!

Christopher Smith
TheOptionClub.com