OptionPundit

Tag: Dow Theory

  • OPNewsletter Jul 2010 Up +8.3%

    We are on track for our 28th positive month of OPNewsletter phase-2, as of last Friday close OPNewsletter Jul 2010 portfolio is up +8.3% on the maximum investment of almost 60% of portfolio capital. We have started opening Aug 2010 portfolios and our first portfolio is already positive.

    Let’s talk consistency first, especially on trades like Iron condor which is probably the most widely used option trading strategy. OPNewsletter has lost only 1 month of RUT iron condor since May 2008, and the drawdown was only 7.15% while gains have been around 12% on average per month. RUT Iron Condor for July 2010 resulted into +23% gains. If someone has invested US$10K, only in OPN RUT Iron Condor, this 10K would have grown over 5 times to $56K since May 2008. This period includes probably one of the most volatile stock market moves of our lifetime. Of course, I don’t recommend traders to invest all the money in iron condors only and which is why we have portfolio approach at OPNewsletter, to diversify risk/rewards.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    During the month of July, we also opend, for first time, an Income portfolio on Google. Just for perspective, since our opening of this portfolio on June 14th, google moved from $480 to $506 and then from $506 to $434 almost without a pause. This portfolio has provided a great deal of learnings e.g. during this period, one of our backspread we opened for only $0.65 debit moved past to show $10 gains!!! Though it was tough and very volatile move, we still managed to gain 4% gains as of Friday close (still open) and we are in for the earning week and out theta gains are a few % points per day.

    Even though VIX and other implied volatility fell through the cliff in general, our Double calendar resulted into above +20% gains and Double Diagonal in positive (still open).

    These results do not include gains/losses on the speculative trades. It also feels good when I find adding value to subscribers as OPNewsletter members were already warned of the coming meltdown since mid April via constance market updates/projections. Though no one can be perfect or correct all the time, so far OPN has been able to serve well.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    Profitable Trading, OP

  • OPNewsletter May +18%, June +5.3% (Open)

    Another turbulent and volatile period! Last week started with a huge gap up rally after EU announced a $1trillion bailout package but by weekend it was a different story. Now there are questions on how solid it was. The confidence barometer, Euro, is now 4 years low and maybe even headed for $ parity as I wonder if EU will really step in to avoid Euro slide.  They should be pretty excited as EU economy may get much needed push with a weaker Euro. For OPNewsletter, we are 77% in cash. Remainder of the cash is invested across 3 income portfolio and we are nicely up +5.3% for June 2010.

    May 2010 was a record month for OPNewsletter. Since the beginning of Phase-2 of OPNewsletter in Jan 2008, this was the highest % gainer. We achieved +18% gains in May 2010. This is coming on the heels of 9.7% in April 2010. We also avoided market meltdown by going into cash before pullback really started hitting hard. These results don’t include returns on speculative trades like VIX (a few times), Google, ISRG, SLGN, and many more. Euro slide didn’t come as much of surprise too, as we had started anticipating this move when 50days EMA crossed the 200EMA for the first time in 18months.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    I have been covering market commentary on both OPDiscussion forum as well as on Twitter. Congratulations to all those who benefited.

    If I could make a suggestion, [b]pls don’t over trade this coming week[/b]; keep it simple and watch the show…just watch out for the two levels I mentioned ([b]Dow 10,300 and 10,700[/b]).

    There were a few trade ideas I shared in the Weekly OPN portfolio tracking; Look out for Silver (CEF, SLV). I think silver’s time is coming soon (how soon, I don’t know). Silver maybe more volatile then gold so you gotta be careful.  As usual pls do your due diligence before investing any single $$ into any stocks I/OP mention anywhere. Regarding Gold, congratulations to all those who have been permabull on this, it hit a new record high (but not quite high yet if adjusted for inflation). If you have sometime, pls do read the this link . This is a post I wrote in 2007 which I hope will provide a historical perspective of how far have we come since then.

    50DMA StocksFrom Market perspective, Internals don’t look attractive and it seems that this pull back still has a course to run. Whether this is a full blown Market Top or just a healthy correction in the on-going primary uptrend, we’ll know only in the Hindsight.

    Look at the attached chart of NYSE stocks that are trading above 50days moving average. The lows are getting lower, in fact recent correction had the lowest % of stocks trading above 50days MA in the last 1 year; including all the three pullbacks. The distribution days are increasing and 90% down days are also increasing which doesn’t paint a healthy picture.

    Here is what one industry veteran (Mr Richard Russell of Famed Dow Theory has to say) –

    Russell suggestion — Do your friends a favor. Tell them to “batten down the hatches” because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country. They’ll retort, “How the dickens does Russell know — who told him?” Tell them the stock market told him.

    He is of the view that one should monitor the two Averages ($DJI and $DJT) hit “spear point” lows, Industrials at 10380.43, Transports at 4298.12 and he considers these to be of extremely importance. If both Averages hold above their May 7 lows, it will be a bullish indication; If both Averages turn down, and one Average violates its May 7 low but the other refuses to confirm, that could be a very bullish sign; If both Averages break below their May 7 lows, it will be a very bearish action, and could predict a crash (the two Averages do not have to break on the same day, but the closer in time they both violate the May 7 lows, the more authoritative and bearish the action).

    Besides a 10,300 level that one should be careful about, I think hard rain is not coming until the averages drops below following levels-  Industrial at 9,835, Transports at 3,740. Though I am not an expert on Dow Theory, I would stay clear if Dow drops below $10,300 and will reposition to re-enter around 9,835 but with risk management plans in place, in case Markets drops further. If However, Dow manages to remain above 10,700, I think we might have run this pullback course; at least for now.

    Thank you all the positive feedback on “Financial Freedom” article. I am glad you liked it and that it could add some value to your existing knowledge. If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    Trade Carefully, Trade Profitable, OP

  • Buckle-Up

    Time changes so quickly, what seemed almost impossible a few months back, just turned into reality and markets are no different. Who would have thought just a year back that Markets all the around world will be cut into half, who would have thought the massive destruction of personal wealth in such a short period? Sure I did warn starting Nov 07 but I myself never had thought the extent. This is one monster grueling bear. As we traveled through those passes, the picture turned clear and clear when I fist warned in Sept to stay away if Dow drops below 10,700, followed my warning for 8,000 and then my final warning to stay away should market cross 7,500 (+/- 200 points).

    Personally I am very concerned. The Dow has broken the 50% principle and if that hold true (as has been several times in the past), the bottom is still far. There is no panic buying in the market rather every rally is being used as an excuse to sell.

    According to Lowry’s research the buying power is multiple decades low and selling power is only slightly below the peak. Even a slight increase in selling pressure during lack of buying environment (demonstrated by 90% up day) can trigger huge sell-off easily. This has been the case, time and again. John Hussman is cautioning his readers to “Buckle-Up”. He writes- “I suspect that the markets are about to get volatile, possibly to an extent beyond what we observed in October and November“.

    (more…)

  • Watch Out for These Levels

    2 months back I shared big picture charts of Dow and SPX and even today, the picture is the same except that the risk is heightened. There is no strong buying in the market and markets just fall simply even due to the weight of selling. Though we are seeing intense selling, it is still not very intense what it was in Oct/Nov and so I think caution needs to be practiced. It’s very hard to control emotions especially when you see lot of “potential opportunities” or “foregone profits” because you were siting on sidelines, but I think capital preservation is more important than missing opportunity.

    Here is the latest chart of the DOW Bull Market that started mid 1932 till all the way Oct 2007. We are not very far from one of the major support, or call it double bottom for the lack of complex technician words. If that support is gone, we are looking for 6,000 as next level of support (technically it is around 5,900). According to Richard Russell of Dow theory, The transports have already closed below Nov Lows, if Dow Industrial will confirm that, we are setting up for disastrous moment. If Dow doesn’t confirm, then we have potential bullish signal. Net, we are at crossroads and next few weeks are going to be crucial.

    Watch out for the next few days action. I think either the next week or week following we’ll have voting on stimulus package which will provide temporary relief to the markets. And oh BTW, as goes the January, so is rest of the Year, and the Jan so far doesn’t look good.

    Profitable Trading, OP

  • Is it Beginning of Bull Market or a Bear Trap?

    We are witnessing extremely volatile markets. From the worst two-day drop since 1987 to the best two-day rally since ’87 – all in one month. Another fun fact is that US Markets had 1st 4days winning streak in last 6months. Too good to expect in such an environment. Albeit, the fact is that markets did rally and it was supported by 2 impressive 90% up volume days. This just create a little more confusion. Have we seen capitulation?

    I am not on either side and staying cautious. But let me present two cases to you, one Bullish and another one bearish.

    First Bullish case by Barton Biggs, who shared this insight originally in Financial times “We are in for the mother of all bear market rallies”. There are 4 key points that Barton has made in the article-

    1. By definition the bottom of a bear market has to be the point of maximum Bearishness.
    2. Valuations are cheap
    3. Stock markets have been obliterated and are deeply oversold.
    4. De-leveraging that has caused such heavy selling is two thirds done.

    He thinks that there is compelling evidence that investors, hedge funds, pension and mutual funds, and the public are not just talking bearish, they have raised astounding amounts of cash. We must be pretty close to maximum bearishness.

    Furthermore, the 4 per cent dividend return on the S&P 500 exceeds the yield on the 10 and 30 year Treasury bonds for the first time in 50 years. He adds “If emerging market equities, where the growth is, at 6 to 8 times earnings are not cheap I don’t know what is”. History shows that even in enduring, secular bear markets there are not just 20 per cent bounces but usually one 30 to 50 per cent rally. He thinks we should be due.

    The reasons why he is not in the market is because he would like to see the credit markets unclog and spreads come in more.

    There is one point though where I wholehearted agree with him-

    At the bottom of a panic, the news doesn’t have to be good for stocks to rally, it just has to be less bad than what has already been discounted. I want the markets to stop going down on bad corporate and macro-economic news. The fact that it still does shows the bad news has not yet been fully discounted. I have no idea when the next bull market starts, but I do think we are setting up for the mother of all bear market rallies.

    Barton Biggs is managing partner at Traxis Partners, a New York based hedge fund, and the author of Hedgehogging and Weatlh, War and Wisdom, two of my favorite books.

    Let’s move to a bearish stand by famous Dow Theorist, Richard Russell of Dow Theory Letters.

    “The bull market started in 1982 and lasted until 2007, a period of 25 years. Most bear market have lasted from a quarter to a third as long as the preceding bull market . The current bear market started in October 2007. It is now just a bit over one year old. Based on Dow Theory, this bear market might have been expected to last six or eight years. I’m skeptical that a bull market that was in force for 25 years could be corrected by a bear market that has lasted for only 13 months”.

    We all know how much Bernanke and Pualson duo is spending to keep deflation away. Massive spending almost of the WW-II footing is taking place. Here is what Richard Thinks of spending and efforts to scare the bear away-

    “Being a Dow Theorist, I find it hard to believe that the government will be able to halt or reverse the primary trend of the market and the economy. This is a sneaky way of saying that deflation will remain in force until this bear market ends. Frankly, I hope that Bernanke-Paulson win the battle to halt the bear market. But I’m afraid that this bear market, like all others before it, will only end in exhaustion. Exhaustion will not occur until the last sellers have sold. And sadly, I don’t think we’re there yet.”

    What do you think? Have we seen the market bottom? or we are yet to see the worst?

    Profitable trading OP