Neutral to Bearish Again

Exited ALL longs (ERX, TYH) at 2pm. Also exited my long futures position in ES & NQ.

Although the market did rise during the past few days it rose too hard too fast for me to continue holding comfortably. I don't think the ES range high near 928 can be taken out, and longs will see some trouble if it's not. On the other hand if it's indeed taken out with volume there's little resistance between here and 950, at which point I'll feel better shorting.

However I'm not short yet. Will wait and see if we turn south from here.

Short Term Bullish

Close post-POMO shorts and opened new longs ERX, PHM. Double POMO day this week combined with earnings releases from several major banks increased the possibility of tape painting.

Close Short Position Until EOD Thursday

Small long ERX.

In Cash

Sorry I haven't updated the blog in the last couple of weeks, well partly because there aren't many good equity trades. But one thing I must make clear:

All you girls should be in cash prior to the FOMC announcement day. It's not worth chasing a few cents of extra profits by risking giving back what you already have. A pure probability decision you see.

That said I do think the next few days' actions will be bullish given the important half year window dressing period. That will turn into a good shorting opportunity unless it's on high volume, which I doubt. I'm obviously still trading futures since they are mostly automated, but my equities account is in all cash now.

A few equity trades in the past couple weeks (I'll update price levels later):

Short NOC, IEO, RTN, CHS, DE, HEW. HEW turned out a loser which was subsequently cut out short.

Stocks Trading Next Week

Monday - Close all short positions. We might have a little manipulation going on! Ha. Well in case like that it's better to reduce exposure. Out of all futures position on Friday as well.

- re-open long position in IEO.

Will go long if market closes up on high vol. But I doubt that. I've never seen a window dressing/gov't intervention/whatever manipulation succeed and it's better safe than to rush on to the long side.

The rest will be updated as we go.

Shorts update 3

CHS: Covered all @ $9.15. I forgot this thing would release earnings. Covered all and waiting for the sell signal to re-emerge. 

HEW: Covered 2/3 @ $28.83. Price target hit and the position was closed automatically by the computer. This is some major support level so I'm siding with the computer here. Will re-short if a breakout to the downside occurs. 

IEO: Close long position @ $45.53 and flipped to short. I'd like to keep the reasons private since I primarily trade oil for a living. 

DBP: Cover in full @ $33.50 AVERAGE. There is NO liquidity in this POS. Stay away. 

P/L:

CHS: -$0.30/share

HEW: +$2.56/share

IEO: + $3.16/share

DBP: -$0.48/share

Shorts update 2

Keep all short positions and keep IEO long. 

Add to HEW short @ $30.15. Each failed attempt to break old highs is resulting in a deeper low. Very low risk short here. 

Initiate new short on CHS @ $8.85. Three brokers "research" upgraded this. What an excellent signal to sell! 

Equity Short Update

1. Close short position on ANN in full @ $7.21. 

2. Close short position on HEW in half @ $29.60. 

3. Close short position on BAC in full EOD (update: @ $11.36). 

4. Initiate new short position on DBP EOD (update: @ $33.02). There is no liquidity with this thing!

5. Initiate new long position on IEO @ $42.37.

P/L:

ANN:  + $1.37/share

BAC:   +$0.75/share

HEW:  Ongoing.

Looking for a short term upmove, then perhaps I'll re-short the consumer disc. sector when the signal re-emerges. 

Stocks to Short

Some of you asked what stocks in particular I am shorting. I generally don't short individual stocks unless I see one that's acting particularly good. Generally I'm looking for a 1) a definite breaking of trendline and 2) another test of the trendline on low volume, which results in a failure. I also use some indicators I programmed on my own as an aid but in general you should never rely on any indicator to enter trading decisions. To that end I disclose two of my stock short positions here:

1) HEW short @ 31.39. It shot up to $32.50ish as I held on then it fell back to $30. I'm still short. 

2) ANN short today @7.82. Looks like shorts were squeezed hard today when prices shot up on heavy volume. This seems to be a classic short squeeze that failed to trigger enough stops (latest high). It will probably go above 8 in the next couple of days but I can afford to wait. My position on ANN is much smaller than usual due to the high probability of hitting 8+ but prices and my indicator is showing unequivocally that price is going to fall shortly. 

Update 5/20/09

Add to ANN short position at $9.10. The insane buying by small lots (100s of shares) this morning gave a clear cut selling signal. I took it and added a large portion to the position. Now averaging short position @ $8.73. 

Add to HEW short position at $30.35. Something strange is going on this morning with major indexes propped up by small regular lots. Market manupulation at its best. Another thing about market manipulation is that it never works for long. So I faded it and added to HEW position. 

Initiated new short position on CHS, selling at $8.55. Some broker upgraded the shares which is a clear selling signal. The consumer discretionary sector was the best performing sector during the rally. Normally I wouldn't short the leaders, but based on my volume reading the surge in this sector is mainly due to small retail buying, which I'll fade without hesitation. 

Initiated new short position on BAC (small) @ $12.11. GS upgraded BAC which means they are selling. It came so predictably that BAC raised a large sum on a stock sale blah blah which means the upgrade is nothing but a pump-and-dump by GS. I used to have at least a little respect for GS analysts but recently they proved that they are as crooked as the other "research" "analysts". 

Short-Term Market Directions

Looks like my prediction last monday (previous post) came true. NDX promptly bounced down from 1275 area and is now around 1225. However in my point of view the correction is far from over. The market hasn't changed a single bit and I can say with some certainty that the big banks will surprise us with a bad earnings picture (both lil' Vik and KL will jump out and say oooooops sorry when we said last month that we were going to make a profit we really meant before writedowns!!...). Then we'll see another leg down, possibly not to as low a level as in March, but a really big leg down. 

What has changed in the market since the March low? Nothing. The only reason behind the last rally is that 1)  the second derivative of economic indicators were ticking up (let's not to mention seasonality here - the investing crowd is too dumb to know), 2) the rumored M2M and uptick rule change and to a lessor degree 3) the belief that the banks were oversold. These false hopes will soon be proven, well, false and the last sucker's rally will fade, if it hasn't already. 

Let's also not forget now is the end of the quarter, and traditionally this is the happy time of tape painting by large funds. I've found an interesting article on this if anyone is interested in finding out more:

www.wallis.rochester.edu/bernhardt/mut_economicsletters.pdf

The thing with tape painting is that its effect will fade away a few days into the new quarter, with that in mind, over the next couple of days I would not be surprised to see a little bounce up tomorrow, and I bet you that the media will be out there trumpeting the new "optimism" again. And guess what the result will be after that's over. 

Remember my preference for the 50DMA as a sentiment gauge. NDX tried to close above that line 3 times since last Nov and every time the rally fails after two weeks, I don't think this one is going to be any different. 

My view is still bearish and that will only be reinforced if we see a rally tomorrow or on Wed. I have NOT entered any short positions yet but will do so after that rally fails. Alternatively we could see a few straight-down days and in that case I advise you, like I will do in that case, to play intraday trades only. With prices at the middle of the channel it does not make much sense to chase a trend, no matter it's up or down. Both NDX and SPX are on my radar this week. 

Again you could buy QID if you can't short the futures. SDS is the SPX counterpart. 

Midday Trading Update

I now hold a neutral to bearish view, which will be reinforced when SPY fails to break 800 on close today. 

My advice is to stick to NQ, and enter short positions on a failed breakout of 1250-1275 range, w/ stop above 1300. Alternatively you can buy QID. 

Citigroup Trade, the conclusion

Two weeks ago I bought C with a covered call strategy, which turned out almost as I expected. I added to the position on C's definitive close above the VWAP. In the next week C went as high as 3.80 intraday but did not close above its 50-day MA, which is usually my most closely watched breakout point. I held C until close before selling @ $2.58, and covered the calls with a $0.01 loss. 

This week I did no futures trades since I was on vacation with sweetheart. I will post my market outlook shortly after. 

I exited the position in full because of C's failure to hold above its 50DMA and the level of large player's participation is dangerously low. 

In hindsight I shorted the calls a little bit too early. I was too focused on time premium and disregarded the skyrocketing volatility, which pushed the calls to as high as $0.30. I could have gotten a lot more from it. 

P/L:

Stock: profit +$1.53/share (original position), +$0.48/share (added position)

Option: loss = -$1 per contract (shorted @ $0.08 covered @ $0.09)

The correct way to buy Citigroup

In general I do NOT advise going long when the weekly trend is down but C clearly presented a risky but potentially rewarding trade. However many people got burned buying the first leg down which is not the correct thing to do. After watching the price for a while I too was tempted to buy some for a pop. After many requests here I post my entry and hopefully it will serve as a reminder the importance of patience and discipline. 

The most impatient people bought intraday on Mar 2 (see the two tall bars to the left) mistakenly thinking that price was recovering. This is a firstclass sucker bet because intraday swing means nothing if you aim for the big profit (which is what you look for buying a $1 stock in the first place). Always place the bet at the close. 

Second grade suckers bought on the close a day later thinking they got a sweet bargain. However the closing hour sported a huge downside volume spike indicating big players liquidating their positions, creating a new intraday low. My philosophy is never buy on an intraday low or sell on an intraday high, because they are inherently instable and is suspect to be broken quickly. I prefer to wait for a retest, which never came for that day and C closed on the low, which is a red flag for me. 

The important point I need to stress when fishing for a bottom is looking for accumulation, which can be tracked using many indicators. I programmed my own indicator but traditional indicators such as Larry Williams's ADL works just fine as a substitute. Over the next two days C went from a period of distribution to a period of accumulation (see last panel) with the price locked in a very tight range. This convinced me that some large players or insiders are accumulating the shares. 

On the last day C closed at the high of the range, I placed a market order at the close which was filled at $1.05. 

The next day my suspicion about insider buying came true. Big Loser Vikram P announced some bullish news which popped C up by a fairly large percentage. But since the accumulation is still not done yet I am still holding C as of March 11. 

Here is my advice:

Be patient. Money is made, ironically, by sitting and not by trading. It is made by sitting tight and wait for condition to become favorable to enter. Then you need to sit patiently and wait for the condition to turn around, then it's time to run fast for an exit. You need to ignore all the news, predictions or other gossip people keep throwing out on CNBC and only base your decision on your own deductive reasoning. Even if that means missing the trade, it's worthwhile from a risk management point of view. 

This method is dull and uninteresting, but in my experience this is the only way to make money CONSISTENTLY, which should be every trader's goal. 

--UPDATE (3/11/2009): Although I am convinced that C can continue to rise at least for a couple of days, I am pessimistic about it's short-term ability to rise above $2.5. Therefore this morning I sold March 2.5 Calls @ 9c a piece. For whatever little time value is left I believe this call is ridiculously overpriced. I am still holding C therefore creating a covered call strategy.