Bullish, Bullish, Bullish, some stocks to watch

Well it seems that it's business as usual. Just when the market gives you pause to think the uptrend might tiring, the potentially bearish weekly candles from last week all got wiped out with a strong week across the board. Particularly encouraging for the bulls is that the Nasdaq and Russell, which I pointed out had been lagging, pushed strongly above their recent resistance.
This image shows the weekly candles for the major indexes since Jan 1. Judging from these alone, it seems that the intermediate to long term trend is still quite bullish.
(Click image to see it bigger)


The Vix remains in its low range. It might be a good idea to set an alert for if it moves above 14.50 or so as a wake up call to assess things.


One observation I'd like to make is something of a cautionary bit. I tend to be a worrier, which doesn't really help in the face of a strong bullish market, but it is worth considering the risk in the air when there seems to be such a strong sense of confidence and perhaps, complacency among the bulls. I think this mockup shows my thinking clearly enough.



The fact remains, as always, that an uptrend is an uptrend until it's not anymore. So everything is all systems go at the moment. But it is interesting to consider the momentum of the last year and whether it might just be waning a bit. Last week's gains were done in a short week(whatever that means) and Friday's finish was on less than average volume.


That said, there's a ton of strong looking stocks out there.
Here's a china play.
CTRP - Very nice 5 year chart with a recent high volume week of an earnings jump. Biggest weekly volume since the end of 2/27 China stock market scare.



It even looks great on the daily chart with the Investools study set. It's looking prime for a support bounce and a set of fresh green arrows.



GROW had some serious volume on Friday for a bounce up and further forming of a potential ascending triangle. It's early to assume that it will bust through the triangle resistance, but a play up to that point would still be a pretty good risk/reward ratio for those bold enough to play it.
The volatility bouncing down from resistance in the last 5 months is unnerving, but considering it was a $2.50 stock just two years ago, maybe this is a very natural and healthy period of consolidation.



Here's another from the investment world.
AINV - It looks like it needs to come in and establish new support here after such a quick upward move, but it's certainly one to watch.



The growth is smaller than we look for, but it is better than its group. Investools has lumped a lot of industry groups together on their recent change to the Big Chart and Industry Group designations. So some stocks, like this one, are compared to a group of stocks that are not entirely accurate as competitors or comparable companies.
This from moneycentral.msn. com.

Anyway, one can quibble about which website is correct or if growth estimates are suitable for one's standards, but a strong chart speaks for itself. The stock is at an all time high after 4 days of above average volume and big moves.

And last, but certainly not least.......
Our very own VSEA!
It's a bit difficult to figure out what the SOX is doing, but VSEA appears to have put in a new support level and it may be ready to resume upward movement.

First the SOX, for your reference. Friday's candle is not exactly what we want to see at potential resistance from a double top pattern.

But VSEA does look nice.


Have a great week. I'm pretty busy in the coming weeks, but I hope to put together a new and improved watchlist for the group. So stay tuned.

Patterns and Sticks in their time, Opera too

I thought I'd make a quick point about candlesticks and patterns in the context of a time frame. I know that candlesticks have been somewhat of a focus lately and we've talked about double tops and bottoms recently, so I thought I'd point out an observation I made this week.
Candlesticks, like chart patterns, are applicable to all time frames and have increasing signficance the larger the time frame. Take a look at this double top formation on the SPX this week. This chart of the SPY shows each candle representing 15 minutes. There is a Double Top reversal pattern that would have worked out nicely as a clear and clean entry point for a bearish intra day trade. There is even a confirmed Hanging Man candle pattern on the second top. One might even consider playing a downward break of the symmetrical triangle in the most recent day for a bearish continuation on an intraday basis.
(Click the image to see it larger)

But would this bearish entry make sense for an intermediate or long term entry? Looking at the daily chart, probably not. Of course, there are plenty of signs that the chart is weakening. My uptrending support line from March was broken and then acted as resistance. The incline of the trend is becoming less steep. This week shows three days with topside shadows followed by a big red candle on Thursday. One could look at this cluster like an evening star formation. It's not textbook, but it tells the same story. With the Investools study set, you will even find that the chart now shows 2 red arrows on the MACD and Stochastic. Nevertheless, the SPX is still in an uptrend and has now found support for the second time in recent weeks at the 20 MA. Though many things may be pointing us to look for a reversal, it is a bit early to call it a top here, particularly when the recent months have repeatedly shown us drastic down days followed by days and weeks of upward movement.

Finally, the weekly chart shows just how the candlesticks and patterns can be used to simplify everything in the bigger picture. It is really quite amazing when you think about the amount of information, news and action that is represented in that one simple candle. This image shows the SPX, DJX, Nasdaq composote, and Russel 2000. The SPX and Dow show very strong weekly candles with the most recent week resulting in a harami, which is a potential reversal. According to Steve Nisson, the Japanese will say that with a harmai the market is "losing its breath." I would say, though, before seriously worrying about a drastic bearish move, we should like to at least see this weekly pattern confirmed with a lower close at the end of this week. For now we must look at these markets in a strong uptrend as taking a very natural breather and perhaps a very healthy pullback.
The Russel and Nasdaq, on the other hand, are looking a bit more ominous. Neither have participated in the strength of the SPX and Dow in the last month and look to be more setup to roll over. The Russell small caps, in particular, have barely found life above the resistance level from late February. Of the "Gravestone Doji" which is seen on the Nasdaq, Nisson says that the Japanese call it this because it "represents the gravestone of the bulls that have died defending their territory."

I hope this is of some use to you. I just want to reiterate that the use of candlesticks and patterns are fantastic but must be appropriately applied to the time frame you are looking at.
On the subject of watching for a reversal, it is worth noting that the VIX has established a very clear level to watch for. Remember, "When the VIX is low(and starts to rise), it's time to go." 14.50 or so seems to be the magic signal for the moment.


So in addition to the ideas from the last post on REITs, Retail may be a good place to look for potential bearish setups if the market does continue to show weakness. We know that our COH has been taking it a bit on the chin lately. But this weekly chart of the $RLX shows a symmetrical triangle that could have big potential to the downside. Having shown relative weakness to the Dow and SPX recently, and with consumers being pinched by the high costs of gas going into the summer season, it would make sense that this sector might take a hit. As is noted in "Week Ahead" found in the strategies tab on the Investools site, Dell, Costco and Sears report this Thursday.


And now for a shameless plug:

As you may know, I am an opera singer.

In case you are looking for a little culture in the coming months, I thought I’d share the information on my performances this summer.
I will be singing in three different operas in June and July. In June, I sing the role of Basil Howard in The Picture of Dorian Gray, a setting of the Oscar Wilde novel by composer Lowell Lieberman . The music is quite impressive and the cast is a very good group of singers. This is being done with Center City Opera at the Kimmel Center in Philadelphia.

There are four performances but it is double cast, so make sure you buy tickets for one of these two dates when I’ll be singing. For more info on the company and these performances, go to their website.

My performances:
Wednesday, June 6, 8 PM
Sunday, June 10, 2:30 PM

In July I will sing two roles with the New Jersey Opera Theater, performing at the Berlind Theater at McCarter in Princeton. In Mozart’s Die Zauberflöte (The Magic Flute) I will sing Sarastro, the high priest of the temple of Isis. In Gounod’s Romeo and Juliet, I will sing Frere Laurent, the provider of poison. For information on tickets, go to their web site.
This is one of my favorite pictures from past performances with that company.

The dates for those shows:

Die Zauberflöte (The Magic Flute), Sarastro

Friday, July 13,8pm
Sunday, July 15, 2pm
Saturday, July 21, 8pm
Saturday, July 28, 1pm

Roméo et Juliette, Frère Laurent

Friday, July 20, 8pm
Sunday, July 22, 2pm
Saturday, July 28, 8pm

Both of the theaters where these performances will take place are ideal for seeing and hearing opera in a more intimate environment. I think they seat somewhere around 600 people. The casts are all young, up and coming talent. So there will be no old, tired, park-and-bark singing here. So come on out to the opera!

For a few last laughs, here's a picture of me as Sarastro in a children's production of The Magic Flute in Zurich. The costume was all mirrors from head to tow. By far the heaviest costume I've ever worn. Not very mobile, but it made quite an affect under the lights on stage.

Here's a picture of me as one of the waiters in Rosenkavalier. Baron Ochs refers to them as Maikäfer, a type of bug that comes out in Spring, so the designers decided to have us painted up as bugs in very nice, linen servant outfits. They do some crazy stuff in the German speaking countries. I won't show you the picture of me as an "old servant" dressed in tight, white boxer briefs and a pink, silk ladies bathrobe with a choker around my neck!


The opera world is a strange and wondrous place.
I do recommend coming out to see any of the productions I'm involved with this summer, even if you've never been to the opera before. They're all good shows, and seeing opera up close is quite impressive. And for those worried about language, they will all have super-titles projected above the stage. I would recommend buying tickets very soon. Almost all of the performances for New Jersey Opera Theater sold out last year and I would expect them to do the same this year. And don't worry, there's not a bad seat in the house, so just buy whatever is available. Ideally, I'd recommend somewhere in the middle of the house and no closer than the first 3 or 4 rows. That way, there's a little room for the sound of the voices to come out and blend with that of the orchestra.

Roaring Market, tired? REITs seem to be.

The Market has been on an amazing tear lately. Big caps have clearly been leading the charge with the Dow and the SPX at record highs and showing no signs of weakness. The Nasdaq and Russell 2000, however have not been quite as hot. Both have spent time below their 20 MAs and the Russell has even plodded along its 50 MA still barely peeking above the peak before the late February sell off. In recent weeks they have consolidated and only in the past week made an effort to retake new highs, though not yet successful. It seems to me that the Dow and SPX are more than ripe for a pullback, but the Nasdaq and RUT may be ready for a breakout to further heights, finally joining in the exuberance. The question is, will the Nasdaq and RUT step it up to join the big caps surging higher or will they all succumb to the weight of a big caps correction? Whatever the case, the easiest first warning signal to watch for will be the 20 MA on the SPX. Until that is broken, there's no reason to worry. After all, we use the charts to show is what IS happening, not what we think is going to happen, right? This is how we take the emotion and guesswork out of the equation.
(click imagine for bigger view)


One important factor as far as the Nasdaq is concerned will be the Sox, which seems to be at a make or break area. After breaking out of its previous range, it looks like old resistance became new support. So a bounce from this level would make a lot of sense. The inverted hammer yesterday(needs confirmation) lends support to that idea. Nevertheless, it isn't a good sign that the Nasdaq was so strong and the SOX tried but then didn't ultimately contribute to that gain. The bullish case for the SOX is further dimmed by a clear double top formation. If it does break back below this support area, the double top will be confirmed as a pattern and we would look to a target of about 470, right back where it was before breaking out of the symmetrical triangle.


If, by chance, the SOX does rally from here, I'd love to see VSEA break its pullback after not holding the level it gapped to. There are a few potential diagonal lines of support and a confirmed hammer a few days back. So it's not out of the question, though there is still some room to go yet before completely filling the gap.


Oil stocks have been ripping lately. How about that SLB flag we discussed at the last meeting? I hope somebody took this trade. I didn't because I was a bit scared by the upper shadows on the 14th and 15th. Would, coulda, shoulda....


I read a good article on the weakness of REITs.
Stocks Can't Fall? Check Out REITs' Retreat. It gives a good perspective to consider with respect to the strength of the current overall markets.
It is interesting too that the weakness of this group has all but been ignored in the recent market hysteria. People go straight to the homebuilders for weakness mentions, but this group's weakness is more recent and may have only just begun. I can't remember, but I think we may have looked at this chart at the last meeting. Regardless, there is a pretty clear head and shoulders pattern there. The long term trend line has not yet been broken, but it seems likely in the coming months to see continued weakness from this group. The Head and Shoulders pattern is said to be one of the most reliable reversal patterns. With a height of roughly 10 pts. on the IYR, an expected target would be around 72.50, coincidentally an old area of resistance.

Just for reference, here's a sweet, year-long head and shoulders pattern on the Homebuilders. Actually, it's kind of funny to look at the last 3 1/2 years as a giganto pattern with a neckline at 550. But I don't think that one is going to pan out, because it would call for a target of Zero. We'd be in serious trouble! :)
Notice that the more recent peak of the homebuilders in February coincides with the all time peak of the REITS.

Anyway, the REITS do look weak, but not quite as gory as the homebuilders.....YET!
I don't know what happened yesterday, but there was huge volume in the IYR was it bounced at both horizontal and diagonal support. So it looks like a bounce is likely, but I'll be watching this group for short entries in the coming weeks if the market does ever run out of steam.

You can certainly search the Investools site for Real Estate stocks, but I went straight to the source to find out what is in this ETF. The Ishares page for the IYR holdings.
I went through a bunch of the top weighted stocks on that list. Many of them look ugly.
Here are some I think have fairly clear lines to watch, either for a support break or a resistance bounce.
ABM

KIM

SPG


TCO

UDR


VNO


It might seem foolish for spending all this time on bearish ideas when the market is ripping. But just as we should be looking for stocks with relative strength during a downtrend for when the market does turn upward, we should also be looking at relative weakness during a bull market for when the market turns over.
Happy hunting.

Credit Spreads for a weakening market

If I had to make a prediction, I would say that this channel on the SPX is about to be broken. MACD and Stochastic are clearly rolling over. After a week of trying to hang onto the 1450 level, the market gave up and retreated south. The 1430 level now represents the convergence of the 30 day MA, the rising support line from the Channel since November, and potential horizontal support from a recent line of resistance. Breaking that area and the recent channel would be a major red flag. Breaking below the 1420 area would be an official lower low.

The Nasdaq isn't any prettier with what looks already like a lower high.


This weekly chart of the VIX isn't all that scarey looking. 12.50 remains the level beyond which we know there is a major change in progress. (I'm setting an alert for my own personal, instant newsflash.) The last week of action on the VIX doesn't look too bad, but it is noteworthy that the entire range of this weekly bar, shadows included, was made on Friday.


So it seems that at the very least, the uptrend is in jeopardy. If we are going to be headed generally sideways if not down, selling calls and doing credit spreads will be more suitable than going long stock and calls. In addition, if the market does begin to break down and VIX begins to rise, this will be accompanied by a rise in implied volatility which factors into the time value of options, making them more expensive. If they become more expensive, it is more advantageous to be an option seller.
If you have stock positions that look to be peaking or going sideways, consider selling March calls on them. Right now we're right in that window of 20 to 40 days before expiration. This time period is where we want to be selling calls in order to capitalize on the last month and more rapid decay of their time premium. (Of course, the proper analysis must be done for each individual position and you must be comfortable with getting called out of the stock or buying back the short call early.)
But let's talk credit spreads. In short, a credit spread is a position made of selling one option and buying another creating a hedged, defined risk position in which the net cost of the two "legs" brings in a credit. Let's use the SPY.

If we owned the SPY, we could sell calls at 145 for $1.40. As long as the stock is not at or higher than $146.40 at March expiration, we will make more money on the position than we would on just the stock. (Note the January post in which I mentioned selling Feb 144 calls.) But what if we don't own the stock? Sell the 145 calls naked? We could do that, but it would require a lot of margin and would theoretically have unlimited risk because the the SPY could take off like a rocket and never stop. Let's make a credit spread out of it.

We can sell the March 145 Call $1.40 and take on the obligation to sell shares of SPY at 145 if "called out." In order to limit our loss and define our risk, we can buy a higher strike price as a form of insurance. Since those calls at a higher strike price will cost less than the ones we sell, the net position will be a credit. I'll choose the March 147 call which we can buy for .65.
The total position then would be a "vertical" spread, March 145/147 for a total credit of .75. It is often referred to as a "Bear-Call" Spread, because it is a bearish position that benefits from the stock going down and it is made of calls. (Bull-Put Spread is the other type over Vertical credit spread.) In the worst case scenario, the stock would fly higher than both sides of our position. In order to fulfill our obligation to sell someone the stock at 145 we could use our right from the purchased call to buy the stock at 147 no matter how high the actual stock price. This makes for a max risk of $2. But with the credit that we took in on the position, we actually are only risking $1.25. The potential return on risk here is .75/1.25=60%.

I should note that I am not going to trade this position. As the name implies, it is a bearish position(even if it makes money in a sideways market too). I am not yet bearish on the market. I think the position is actually not such a bad idea and could work out very nicely. But it's more a matter of what kind of trader you are and how you will manage your risk and where this fits into your portfolio.

The example is more for the purpose of at least attempting to introduce the concept of a credit spread before refering to them further. I have mentioned a trade on BHI that I intend to recount for you, but felt the need to do a general intro to what a credit spread is first. Also, because people seem to be more comfortable with calls than puts, I figured it'd be best to use a call spread as an example.

What I will get into on the next post is the prospect of reversing a trade. In short, if you put on a Bear-Call Spread and then the stock or index moves very aggressively bullish, you can close the short side of the spread by buying back the 145 calls for a loss. But by keeping the 147 long calls, you would then be in a position with unlimited profit potential. In doing this, we switch our position from a bearish one to a bullish one. This should not be done flippantly. I'll discuss further in my coming post on the BHI trade. (Sorry, I know I've mentioned it a number of times already and haven't done it yet. I just don't want to write any more at the moment.)

Be carefully out there. Choppy waters.

FED relief

The FOMC released their statement today at 2:15 PM and decided to keep the target fed funds rate at 5.25%. It seemed a foregone conclusion that they would not cut rates, but judging from the action in the markets starting at 2:15, I'm thinking what people needed to hear was that there wouldn't be a rate hike. Even if slower, the economy is still growing and the bulls seem to want to run further. Look at today's chart with 15 minute candles for the SPX, Nasdaq composite, Dow Jones Indusrials (Thinkorswim doesn't support the ticker for the dow, so the DJX is the same thing at 1/10 the size) and the Russell 2000 small cap index. The red line is drawn before the 2:15 candle.
(click image to see it bigger)


Look at the total volume New York Stock Exchange for the past 4 days broken down into 15 minute chunks. The cross hairs on each day show the level right before the 2:15 period began. Today's trading increased significantly as the market pushed rapidly higher in the last hour and forty five minutes of trading. Perhaps that seems like a silly and obvious observation to make, but it is a good piece of confirmation for the upside sentiment.
(I still can't figure out why this Total volume chart doesn't' show the same numbers we see for total volume on the NYSE home page or Yahoo. Nevertheless, it gives a good relative picture.)

Though the Nasdaq and especially the SOX still look somewhat questionable in their technical strength, the Dow is back working on a new high and the SPX has jumped back above the 1431 resistance line I've shown on recent posts. So it seems the breakout may get another chance.
But most of all, I like the look of the Russell 2000 moving above it's relatively orderly period of sideways consolidation. This would indicate that small caps would be good stocks to look for buys, or you could just play the IWM, Russell 2000 ETF. Remember that even if you're wrong about a bullish stance, it's best to get in near support so you know where to get out for a small loss. It did come in more than the other indexes off the high of the day, but strength tomorrow could be a great entry. I would look to 79 for new support and aim for a target of 81 judging from the height of the sideways channel.


Notice that the FOMC statement mentioned tentative signs of stabilization in the housing market. The housing stocks have been rising steadily since September and were up nicely today even before the statement and more so after. Our KBH is looking well on its way. 55 may yet be a point of resistance in the short term, but 60 seems like an inevitable destination.


I'm kicking myself over ISE, which I discussed briefly in the last post. If had stuck to my original plan to give it room up 'til 47.50, I'd be feeling very good right now. I guess this is one nof the major realities of options trading. The massive swings in option price can really bring out the emotions. This is why we have to examine what we as individuals are comfortable with. Mine was a good analysis and the exit was not such a horrible decision either based on what I was seeing. But the added pressure of time decay and the leverage of the option are more what weighed on my decision, emotionally, than my certainty that it was going to go upward, the wrong direction.
I don't know what happened today, as there's no major news, but the stock is down on big volume. The ideal bearish entry to make here would have been on the first lower high after second of equal highs. That also was a bouncing down off the MA and had 3 red arrows. Would have been much easier to sit through the turbulence during which I bailed out. Double GRRRRRR!
That this stock had such a down day with no obvious news when the market rallied strongly does not say good things for it at all.


Happy Hunting. If the market is going to start a another leg up, this is the place to be looking for entries. The VIX, by the way, feel lower again today for a definitive lower high.

Sideways Market?

The market has shown amazing resilience in recent months. But it continues to show chinks in its armor. Most notably this week, the SPX had a nice breakout day demolished by a bearish engulfing day to follow it. That leaves the index kissing the MA and heading toward a likely third red arrow. If it does break the MA, it will also likely break the support line from the channel since November. Nevertheless, the tracks for a downtrend will not begin to be laid until the last significant low at support in the 1410 area is broken. Until that time, we have to assume we're still moving at least sideways, if not up.


The Nasdaq already has older red arrows on the MACD and Stochastic and a relatively fresh red arrow on the MA. Its breakout failed two weeks ago already, but what's most amazing is that the big bearish engulfing on Thursday of this week happened right at the old resistance line. It's just weird the way this stuff works out sometimes. In any case, sideways action seems even more likely on the Nasdaq, even if this 70 pt. wide channel is likely to be broken in the near future. The biggest message is that the uptrend is very much in question for the near future.


So this brings me to one of the basic principles taught by Investools. We should adapt our trading to the market. Though it may take time to become proficient and confident in such a variety of strategies, eventually we want to be able to make money in all markets, up, down or sideways. Here is the general application of strategies:

• Uptrending market- Long stocks(buying), long call options

• Sideways market - Covered calls, advanced options strategies(spreads, protective puts, etc.)

• Downtrending market - Short stocks(selling), long put options

Of course, advanced options strategies can be applied to all markets, but this is the simple ideal. Theoretically, the best way to take the most money out of the market if you know what you're doing.

With the assumption that we're moving sideways, let's explore what we might do if we were long shares of SPY. Assuming we're using the Investools method, the 3 red arrows are a sell signal. However, for the purpose of not getting whipsawed in an intermediate term trade every time we show 3 red arrows, we might use the "3 and 3 rule." This guides us to move our stop loss order up when we receive 3 red arrows to 3% below recent support or the MA. Using the MA currently at 142, that would put our stop at 137.74. (To find the level of 3% below support, just multiply the support level by .97)
Realize that because the SPY trades at 1/10 the size of the SPX this distance of over 4 points here is over 40 SPX points, seemingly quite a swing. If we're in a longer term position, that would be a fairly normal occurrence to ride out. But who likes to ride out a 40 point down swing? Perhaps the seller of covered calls wouldn't mind.

With the market showing signs of a sideways inclination but not yet a full blown down turn, three red arrows would be a good time to think about selling calls on our spy position.
Looking at resistance from the failed breakout being at 144, I would probably be most inclined to sell that strike price in case there is something of a bounce off the MA. This way, I'd still have some room to profit from the rise in the underlying shares owned.


Looking at the options chain as it is over the weekend(but will change somewhat at market open on Monday) we can get .60 for the Feb 144 call with 19 calendar days (15 trading days) left in its contract. With a credit of .60 taken in from the covered call, if we get called out upon the stock closing above 144 at expiration, our selling price will be essentially 144.60. One could also opt to sell the 143 for a higher credit, but the likelihood of being called out of the stock would be higher as you can tell from the Probability of Expiring (in the money) column.

One might even decide to sell the further out month to bring in more premium. Under 20 days out seems to be the recommended cut off for selling options, but 19 or 18 is probably okay if all the analysis is there. This is just getting into the rapid acceleration of time decay. Notice that the Theta is higher on the February options than on the March options. Ideally, as the stock moves sideways, we'll burn down most of the time value on the Feb call and then roll it(buy back the Feb call for cheap and sell the March call at the same strike price).

While the downside of doing covered calls is capping your potential profits, sometimes it is still quite attractive to squeeze out a little more juice from a holding. Though it is certainly possible that the SPX would rally more than 24 pts. to beyond 14,460 in the next 3 weeks, judging from the analysis above, it seems unlikely. So in this case, though we'd be very happy to see the stock move above 144 and call us out for this profit, the strategy is being employed to "generate income" on our holding as some people say, or better yet, reduce our cost basis on the shares owned.

Another interesting strategy taught by the people at Thinkorswim would be to do a virtual covered call on your entire retirement account, assuming it's in broad market funds. If you're in Mutual funds that roughly track the SPX, you could sell calls of SPY just like we did here. But since you don't own shares of SPY, they would be considered naked and you'd have unlimited risk since the index could shoot up to the moon. To cover the risk and keep it at a nice defined risk level, you would buy calls further out of the money than the ones you sold. You would then have the right to buy the stock just higher than where you'd obliged yourself to sell them to someone else. You could think about the bought calls as insurance. But being further OTM, they'll cost less than the ones you're selling. This creates a credit spread, in this case a Bear Call spread.
Using the quotes right now, it looks like a SPY Feb 144/145 call spread could bring in a credit of .30 or so, assuming we can fill somewhere between the bid and the mid price. Even if the market rallied hard and we lost the full .70 at risk in that spread, if the position were sized proportionally appropriate to your fund holdings, the profit in your funds would still compensate for the loss of this smaller position. Seems like a win/win situation. One could also do a bear call spread on the SPY even without mutual fund holdings, but you're then risking betting against an essentially bullish market without the benefit of an underlying component picking up profits if the market rallies.

Of course, selling calls or credit spreads does not negate the damage done when the market turns south. When the blatant sell signals are given to get out of the market, simply buy back any short calls or call spreads. Then, sell the underlying stock.

In closing, though I used the SPY as the model for selling covered calls on warning signs of an uptrend in trouble, this can of course be applied to stock holdings as they waver before either breaking down or resuming their uptrend.

On another subject, as if the whole risk factor hasn't been beaten to death lately by yours truly, here's an article from IBD on cutting losses short. Jeff Kohler has also recently done a blog posting about Position Sizing. Like mine, his postings are sometimes a bit on the casual side and less than definitive, but he gives good insights that are worth reading.

I will try in the next few posts to look at some of our stocks with an eye toward strategies for a sideways market.

Market Posture

I'm going to do another Market Posture now that we've got a couple weeks under belt in 2007 and the opening jumpiness is behind us. As much as it scares me, I'd have to say that the market has turned to remain quite bullish. (This being scared to bet bullish is something I need to work out, psychologically.)

The horizontal and diagonal support lines for the SPX held up and we're still in our channel from early Nov. Although the weekly close was just higher than the previous ones, we're still essentially at resistance. But it's certainly a big, strong bullish candle closing right at the top. On price action alone, which is of course king, since we're nudged right up against resistance with a whole lot of bullish momentum behind us, we can only assume we're more likely to move upward than downward. For the all clear, we'll need a break above 1432 and then we're officially back at a 6 year high. 1410 remains support just below us.
(Click image for larger view)

As a point of caution, let's consider what the indicators are telling us on this weekly chart. MACD has just crossed into the red, which indicates waning momentum. Stochastics are inching a bit lower in the overbought zone. These are weekly indications, remember, so they're a bit removed from what we can expect day to day. In any case, price is king and we must make the bulk of our decisions on trend and support and resistance, but it's not a bad idea to consider what the these lagging indicators are telling us.
One other point of consideration is that we're approximately 90 pts. above the 30 week MA. Looking back at the bull market since it began in '03, I find only two other places where we were 90 points extended from this MA. Make of that what you will. I don't think that necessarily means that we won't push higher. It's just to consider that we're extended and a correction would be a healthy thing. From what it looks like now, perhaps we'll have a "correction by time but not price," as Peter Reznicek says. That means that the price consolidates sideways while the MA gradually works its way up to meet it for a "correction" of the distance between price and moving average.


The Daily chart shows us that the 20 MA has been increasingly challenged, but the 50 MA held strong and provided us with the bounce. The Market forecast shows the Intermediate line turned back up with room to rise, so the outlook there is bullish. Even the longer term Market Sentiment line ticked upward ever so slightly.


Not much to say about the VIX other than....WOW. Seems a ceiling is being strengthened above us here. That's quite a serious red candle on this weekly chart indicating bullishness (as an inverse indicator).


As for the Nasdaq, HOLY COW! Is that a bull flag that just broke out? I'm not so sure that Flags are meant to be seen on such a large time frame, but if so, this would suggest a rise from the breakout point of about 450 pts.(The height of the Flag Pole). Notice that the index also decisively broke through the multi year channel resistance line in light blue once and for all.

The weekly indicators show essentially the same extended condition on the Nasdaq as the SPX. But I think the price action here is much stronger and trumps all, so I'll forgo that part. Market Forecast looks roughly the same too.
For a target perhaps more reasonable to deal with than 450 pts up, we could look to the Fibonacci Retracement levels of the fall from the bubble burst down to the low in 2002. Notice how the rally responded around the first and less significant 23.6% retracement level. The 38.2% level would give us a target of 2,645, about 140 pts. higher than where we are now.


Oil is now in a serious down trend with room to go further which, at least in the short term, seems to breathe life into the market.


In summary, I'm finding little reason to be other than bullish. The Vix remains in the low zone. The Nasdaq is now at a strong 6 year high. The SPX has a potentially magnetic affect drawing toward 15,000. The Dow is at an all time closing high. Remember the very, very simple truth: New highs lead to more new highs.

The main bits of caution as I see them are this:
If oil falls apart further and brings all of the energy related stocks with it, that could take a toll on the SPX. Rotation out of oil into Tech. is probably a big part of what's causing the Nasdaq to finally regain the leadership role.
The daily SPX chart with three green arrows is heading up in its recent channel with room to go. With a break above this minor resistance(a potentially nice buy point on the SPY), it should be able to shrug off the bearish divergence showing on the MACD.


The Nasdaq's three green arrows and breakout above a period of healthy consolidation look very strong. But with 5 up days in a row, I wouldn't be surprised to see a test of the 2,470 area in the near future to establish new support. A bounce off that level would be a great entry for bullish plays on the QQQQ.

It would be a very good idea to spend some time looking for strong Tech. stocks for your watchlist.

On that note, I'd like to put out an invitation for suggestions of stocks to add to our list. I'd like to rotate out some of the laggards. Take a look through the list and see which ones look like they should be fired. If you can come up with a replacement from the same or a similar industry group, leave the suggestion in the comments section below with a bit of your reasoning why you like it. The only stipulation I ask is that you aim for optionable stocks trading around 1 million shares per day or more.

I'll try to get a post up in the next few days with a look at the major sector indexes.