Seasonal Weakness Ahead
June 16, 2006
A stated a few weeks ago as the market was tumbling that we were “very oversold” and a bounce was imminent. This was not a big surprise and most traders, while tentative, were predicting the same outcome. Now many market participants seem befuddled by the next move. Was the recent rally a last ditch effort before the “real” bottom occurs, or did last Wednesday’s trading mark the bottom?
As I have mentioned several times over the past month (also in the last Options Expiration report) that the period following June Options Expiration is historically, seasonally weak. Couple this information with the bearish phenomenon that occurs the day following options expiration and we could possibly be back at the recent lows in the short-term. Institutions are still showing heavy net short positions and you have to wonder how much of the move on Thursday was fueled by the big boys covering their positions. This certainly seemed to be the case in the options arena. I just don’t think the Bears are going to give up that easily.
Daily Articles of Interest
RSI Wilder (5) for June 16, 2006
- SPY 45.7 (neutral)
- DIA – 57.1 (neutral)
- QQQQ – 52.7 (neutral)
- IWM – 46.3 (neutral)
Best 2-day gain since early 2003!
June 15, 2006
I have to keep it fairly short tonight as I have to attend my first birthing class tonight. My wife is expecting in late August so let the fun begin.
Wow! The bulls were relentless today as the market moved sharply higher throughout the day. Our Gap Fade strategy suffered as a result of the move higher. While I absolutely despise losing trades I am comforted in knowing that my account will live to trade another day. After the last few weeks of trading many traders are not able to say this.
Important note: As a result of today’s trade I have decided to initiate a new stop loss policy, one that is fixed at $.30 to $.35 per trade. I have opted to do it this way, instead of on a percentage basis. Any comments regarding this change would be greatly appreciated.
RSI Wilder (5) for June 15, 2006
- SPY – 58.5 (neutral)
- DIA – 62.0 (neutral)
- QQQQ – 61.1 (neutral)
- IWM – 54.9 (neutral)
Will today’s outcome last?
June 14, 2006
After the market struggled to sustain any type of gains intraday, the bulls stepped in during the last half hour of trading to move the markets higher. Today’s bullish results ended what has been a dismal stretch for the market. The question is, “Will it last”? Everything seems to be pointing towards a continuation of todays performance, I am just not sure how long it will last. The seasonality following June Expiration is historically very weak. This (along with many other reasons) is why I am a little leary about the sustainabilty of a bullish move. I think there just might be one more washout before the real money is made. Even so, I still think a short-term trade to the long side could prove to be very profitable over the coming days although tight stops are highly recommended (preferably at today’s low).
I few people (two to be exact) have commented about the lack of trading in the ETF Extremes strategy. In a way I understand the mentality. I had the same mentality when I first started trading and struggled to fully understand what it took to be a successful trader over the long-term
I learned quickly (especially in options) that placing value on the quality rather than quantity of trades was the approach of the elite traders. Who cares how often you trade, it is the ultimately the outcome at the end of the day that we are all judged by as traders. Is it worth risking all of your gains during one or two sessions on an account that took months to build.
It boils down to discipline. Just look at how many people over the last few weeks have stepped in thinking a bottom had formed. Equities, commodities, emerging markets, even sectors with inverse relationships to current market trends, almost everything (which is a rarity) has declined in unison. Yet, our strategies have performed with flying colors. I am not boasting (maybe a little) because we all know where that usually takes us, but rather, trying to point out that building an account takes time.
When I first moved to NYC I met an insitutional trader for one of the largest insitutional firms on the street. He likened his trading to “wood”. They call my style “wood”. He had been a succesful trader his entire career using this method, not allowing the daily market madness to suck him in. He only made a few trades a year (by most traders standards) and he patiently waited until the odds were in his favor. Consequently, he has been extremely successful duing his career and that is what counts at the end of the day.
Of course this does not mean he was able to eliminate all risk. There is always going to be risk in trading, ALWAYS, but limiting that risk through a combination of high-odds set-ups, capital preservation and money management separates the novice trader from the seasoned and successful trader. Anyway, I will continue this discussion tomorrow. As I always say patience, patience, patience!
RSI Wilder (5) for June 14, 2006
- SPY – 30.6 (neutral)
- DIA – 39.7 (neutral)
- QQQQ – 33.3 (neutral)
- IWM – 27.2 (oversold)
Have we reached a tradeable bottom?
June 13, 2006
How many times over the past few weeks have we heard the talking heads mention a tradeable bottom and how many times have they been wrong. I suppose if you say it long enough you have to be right eventually. Certainly, the probability to make a trade on the long side have increased significantly, but why be fooled two, three, four times, especially when you know important inflationary reports are due out over the coming days. Be patient.
With the mixed inflationary numbers this morning and the more important CPI out tomorrow, did traders really think after what the market has experienced over the past few weeks that traders would show any type of conviction. Sometimes staying on the sidelines and waiting for confirmation of a move is a wonderful thing, just ask the options traders whose trading accounts have been practically depleted over the past few weeks.
Tomorrow could be the big pop that everyone has been anticipating. Last month’s CPI led to big losses so your guess is as good as mine. It is how the market reponds throughout the day that should give us some much needed clues as to where we are headed – at least for the short-term. The question is how long will it last? If the Fed has indeed gone too far and the economy continues to slow down then we could be in for quite an intermediate move – to the downside.
RSI Wilder (5) for June 13, 2006
- SPY – 14.3 (very oversold)
- DIA – 11.5 (very oversold)
- QQQQ – 14.5 (very oversold)
- IWM - 13.0 (very oversold)
Back To Thursday’s Low
June 12, 2006
The market is back to “very oversold” levels and many of our measures are reaching extremes. You know what that means. Yes, a signal looks imminent although we have said that before to no avail. The market is in the same condition it was a month ago right before the two key inflationary reports (PPI and CPI) were due to report. Last month, the market tanked and moved deeper into oversold levels not seen in years. Could it happen again? People were calling the bottom for days and many market participants paid dearly. Fortunately, our we were able to avoid such a catastrophe as our key options trading indicators kept us on the sidelines.
The PPI is due out tomorrow and should give us a decent indication where we might be headed over the short-term. Last month the market responded favorbly to the numbers, however, the bullishness did not last as the market sold-off and finished lower on the day. The following day the CPI disappointed and the market moved sharply lower.
Given the current state of the market, the next few days could be extremely important for the market. More and more bullish indicators are showing up so a short-term reversal seems likely. But, as we all know, nothing is certain when it comes to Mr. Market.
Daily Articles of Interest
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Cases Have New Twists
RSI (5) for June 12, 2006
- SPY – 20.1 (oversold)
- DIA – 15.7 (very oversold)
- QQQQ – 15.9 (very oversold)
- IWM – 17.6 (very oversold)
Wall Street’s worst week of the year is finally over!
June 9, 2006
During a week of hardly any worthy econonomic reports the market moved substantially lower this week. However, the market woes did not affect our Gap Fade Strategy as we were able to make 12.1% on our trade yesterday. We can’t say enough about our strategies and their peformance so far this year. Diversification is the key to success over the long-term and our strategies have presented a wonderful opportunity as a possible way to diversify a portfolio. I guess this is why alternative investments have become so popular over the last few years. Now that the average person can access strategies that were once only offered to the financially priviledged there is no excuse not to educate yourself on the many investment alternatives out there.
Uncertainty surrounding inflation continues to be a hindrance for the market. Now Wall Street will focus on the upcoming PPI and CPI on Tuesday and Wednesday, respectively. This market is extremely data dependent right now, so both of the reports (especially the more heavily weighted CPI) should give us decent clue as to where this market is headed.
Next week, should present a few decent trading opportunities given the current oversold conditions established Friday. With the Monday and Tuesday of expiration week historically positive, the next few days could (and let me emphasize could) be present a few short-term opportunities. However, given the uncertainty surrounding inflation the market could trade sideways until the PPI and CPI are out. Until then, have a wonderful weekend!
RSI Wilder (5) for June 9, 2006
- SPY – 29.1 (oversold)
- DIA – 21.3 (oversold)
- QQQQ – 25.4 (oversold)
- IWM – 27.3 (oversold)
Is this the beginning of a Bear Market or just a correction?
June 8, 2006
Once again, the market vacillated widely today on continued concerns over interest rates. The market opened lower and moved slightly higher shortly after the opening bell to close the gap and then proceeded to plummet. However, the sharp decline was short-lived as bargain hunters stepped in around mid-day to stop the bleeding and moved the market higher. The S&P was able to hold an important support level (one that I think could be tested again over the coming weeks) establised in ‘04. The market continues (in my opinion) to carve out what could be the summer trading range.
The S&P did close below its 200 day moving-average and the Russell (IWM) an Dow (DIA) managed to close slightly above this psychologically important level. Watch these three major indices closely and how they respond to their respective 200 moving-averages. So far things look good. Furthermore, bullish indicators continue to become more plentiful at least for the short-term. The question is , where is thing headed over the intermediate-term?
Our Gap Fade strategy had another successful trade today. Both of our strategies continue to outperform the market by a wide margin, although our ETF strategy has yet to have a signal for quite some time. Hopefully, that will change soon. If the major indices had held at the lows of the day a trade was certainly imminent. As I mentioned yesterday if the market continues its bearish ways and brings the four indices into oversold territory then we could have a nice set up. Sometimes in market like we are currently experiencing, sitting on the sidelines is the preferred method of trading.
RSI Wilder (5) for June 8, 2006
- SPY – 32.6 (neutral)
- DIA – 22.6 (oversold)
- IWM – 31.7 (neutral)
- QQQQ – 30.7 (neutral)
Mid-Day Rally Fails
June 7, 2006
Another mid-day rally failed today and moved the market lower for the third consecutive day. The Nasdaq is now at a fresh seven month low and the Dow at a four month low. The Dow has managed to lose 6% since the last fed meeting. If the bearish trend continues the high-beta Russell and the benchmark S&P will soon join the previously mentioned indices at new monthly lows.
As I mentioned yesterday, there are a few bullish indicators starting to show up. I would still like to see all of the major indices move into oversold territory before placing any long trades, so I will stay disciplined until the time is right. After talking with a few traders today, it seems as though the majority of them are in cash right now waiting to gauge some type of directional move before they decide to step back in. Why guess, preserving capital is a disciplined and sustainable approach. I still think the market is in the midst of carving out a trading range for the fast approaching summer months. I would not be surprised to see a bounce over the next week (once we reach oversold) and then a continuation of the decline after options expiration.
As I have stated a few times over the past several weeks, the period immediately following June expiration is historically very weak. So, if we do get a bounce over the coming week be prepared. I am never one to place a trade solely on seasonality, but if the stars are aligned then the probablity of a succesful trade increases dramatically.
Daily Articles of Interest
RSI Wilder (5) for June 7, 2006
- SPY – 33.6 (neutral)
- DIA – 26.7 (oversold)
- QQQQ – 31.9 (neutral)
- IWM – 31.2 (neutral)
Fear among investors continues – Will the Fed go too far?
June 6, 2006
The market continued its recent slide today as investors remain frustrated over the uncertainty surrounding inflation. Another decent market-wide decline tomorrow and we could be back in oversold territory, which means there should be some decent set-ups over the coming days. That is, if we reach oversold territory. Support levels held up again today in the S&P which is a decent sign we could start to see a move to the upside over the short-term. There are also a few other bullish indicators that are signaling an extreme.
I have been contemplating opening up a new strategy, one that involves SPX. The strategy is a basic Iron Condor Strategy (I mention it on the insiders page of my site). This strategy works extremely well in range-bound markets and would offer another way to diversify your options portfolio. I would love to hear any feedback regarding this idea. If the response is decent we could be offering this strategy over the next few months. Also, we are talking about opeinng up our service to other brokerages as well. We absolutely love Thinkorswim, but we have had several emails from interested subscribers that wish to have our service auto-traded at their respective brokerage. Furthermore, we are moving ever closer to our subsciber limitations which means we will have to add interested subscribers to a waiting list. There is still plenty of time to get in, but if we continue to receive the response we have had over the last few months we could be shutting out new subscribers in a matter of months.
As always any feedback is welcome and appreciated.
RSI Wilder (5) for June 6, 2006
- SPY - 41.2 (neutral)
- DIA – 29.4 (oversold)
- IWM – 36.7 (neutral)
- QQQQ – 37.6 (neutral)
Inflationary Concerns – What’s New
June 5, 2006
Big Ben let it be known today that Fed policymakers “will be vigilant” in battling the recent high readings in core inflation. He stated the economy was “in a period of transition” and alluded to the fact that rate hikes were inevitable if inflationary concerns persist.
Lynn Reaser, chief economist at Bank of America’s Investment Strategies group stated “he is sending a signal that further rate increases are likely to stem some of the upward drift in inflation.” She went on to say “Chairman Bernanke seems to be advocating a further rate hike as an insurance policy against rising inflation.”
As I stated last week I thought this market would test the lows established a few weeks ago and I think that is going to come to fruition. In my eyes this just presents another welcomed short-term opportuntity. If this market does indeed move into an oversold position I think our ETF strategy could possibly trigger a signal . The stars are moving closer and closer to alignment. This does not mean I think we are not going to move even lower after the initial pop off of what seems to be an area of strong support. Again, keep a close eye on the 200-day moving average of the S&P.
Daily Articles of Interest
RSI Wilder (5) for June 5, 2006
- SPY – 44.2 (neutral)
- DIA – 35.0 (neutral)
- QQQQ – 38.4 (neutral)
- IWM – 39.1 (neutral)
