IS DRYSHIPS A "GHOST SHIP"

If you are a fan of dryshippers (which by the way is the hottest sector around), you'd probably be aghast last night and saying loudly, WTF ! It looked liked a big crash for Dryships (DRYS) and its brethren, including companies such as Excel Maritime (EXM) and Diana Shipping (DSX). Look the chart below to see the large Bearish Engulfing Candle last night.

That was a 17.5% drop, or a whopping $22.97, to close at $108. But even the other stars were not spared, as Excel Maritime closed down $16 to $63.91, and Diana Shipping suffered $5.63 to $39.19.....Ouch! So what was the culprit. It was actually two issues. The first was an article by the the Financial newsletter Motley Fool questioning the profitability of Dryships in an article entitled "World's Scariest Stocks: Dryships" on Monday (Oct 29th) and the fact that freight rates dropped unexpectedly. Here's what Forbes said,

"Freight rates on cape size ships, which are the largest vessels, dropped unexpectedly on Tuesday, which some analysts say may be a sign that Chinese steel production has leveled off, causing shipping prices to decrease as less vessels are needed. Others said that Chinese steel producers are downplaying the demand for steel by holding off on chartering ships in order to rattle the shipping industry since a decrease in demand for steel would mean a drop in shipping prices."

Let's see whether the stock stablises in the next couple of days. Trying to catch a bottom on bearish engulfing pattern is akin to catching a falling knife. Btw, since the stock was never at its RSI-2 level, you should not have a position in Dryships. Follow the rules.....

Chief Shook

WILL THE CHAIRMAN GIVE US A TRICK OR TREAT?

It's Halloween again! And the question on everyone's mind is WHAT IS THE FED GOING TO DO TONIGHT and how will it affect the markets? The markets have made their demands clear, that they want a rate cut of at least 25bp. But will the Chairman deliver? Your guess is as good as mine.

So how do we trade this? Since this is a very tricky event, I suggest we not even try to anticipate what they're going to do. Rather, it'll be better to wait and see what they do and trade accordingly (trade the reaction to the event). There are only two ways about it: Either the US Dollar goes up (risk aversion) or the US Dollar goes down. The US Dollar going up will be a counter-trend move which we should allow itself to play out. The US Dollar going down has already been priced in and is the current trend. This should bring the AUD and CAD higher, as Gold and Oil prices will rise when the US Dollar goes down. If this does materialise (and we'll only know after 215am tonight), I'll be betting on continued gains in the Aussie. This is because Gold is perilously close to the US$800 level, where there is a high "short level" interest. Breaking above this level will cause the shorts to covers their positions, and send anything related to Gold higher (adding "fuel to the fire"). This would of course, means the Aussie and also Gold stocks such as Goldcorp (GG) and even Coeur d'Alene Mines Corp. (CDE). I'll be all over GG and CDE....Good luck for the next several days. And don't forget, we still have the Non-Farm Payrolls for Friday.

Chief Shook

IS THERE CORRELATION BETWEEN OIL AND PALM OIL?

.....Other than the fact that Palm also ends in Oil? In Brazil at least, when farmers started to use Sugar for ethanol (cars there are powered by sugarcane ethanol), they were able to get a higher price for their sugar feedstocks. In fact, in his book "Hot Commodities", Jim Rogers has said that
In the USA, the use of Corn for ethanol has caused the price of the crop to go up, and affected other industries which use corn as feedstock, as well as a rise in rail stocks (which transport the ethanol). So when Palm Oil may also be used for Ethanol, it makes sense that the price of Palm Oil should track the price of Oil. I've decided to check this out and put together the charts of USO (the Oil ETF) and the spot price of Palm Oil (trade on the KL's MDEX). Here's the result.






















Today(Firday, Oct 26), as Oil briefly topped US$91 per barrel, CPO futures (Dec) touched RM2,819. (so there was correlation today). I'll have to watch this really close, as it could make trading in Palm Oil much easier. We can trade USO through Options, but Palm Oil has to be traded through Futures. This makes it extremely important to know what you are doing with Palm Oil, since you can literally lose everything (and more)! Beware of Gaps.....

Chief Shook

WE THOUGHT HE WAS NUTS IN 1999....

Way back in 1999 (when life was fun as we were all "virtual" millionaires), legendary trader Jim Rogers (partner of George Soros at the Quantum Fund) predicted a major commodities bull run, based on the simple law of "supply and demand." Many ignored him, or derided him - after all, stocks were red hot and even your grandmother could make a killing daytrading. Ah, yes, but then Jim Rogers has been proven right! Just look the charts of commodities such as Oil and Gold, commodities companies such as Allegheny Technologies and Freeport McMoran, and commodities dry bulk shipper such as Dryships. The good news is that Rogers thinks the commodities run still has legs (until 2015 in his book), and that the next big run will be in agriculture. Care about PALM OIL, anyone? (next blog entry will be on Palm Oil and why I think it's a decent play for investors).

Now Rogers has predicted that the best currency to be in will be the Chinese Yuan which he expects to quadruple (its now at 7.5 to the US Dollar). Rogers is also buying the Yen and Swissie as he believes that the "carry trades" will collapse one day. And Rogers is taking this action because he believes the US Government is "debasing" the US Dollar (citing that the British Pound lost over 80% of its value as it lost its status as the world's currency reserve).

Believe him or not? You choose (with the benefit of hindsight of 1999, of course). Here's the link to the article on Bloomberg (titled "Jim Rogers shifts out of Dollars to buy Yuan").

Chief Shook

OPTIONS FOR FOREX

Many people do not know about Options for Forex Exchange. But they are here, alive and kicking! And for that, we really have to find a way to use them, like we use in our Covered Call trades. These are for Hedging purposes. The great thing about Forex is that currencies TREND VERY WELL, and this means that we mitigate one of the problematic issues with Buying Options, which is Time Decay. The Options for Forex which really piqued my interest are the options for the Canadian Dollar (CDD), Japanese Yen (YUK), and Euro (EUI). The options offer a great way of setting a hedge against a position (without the use of hard Stop Losses, although you might want to use Mental Stops).

For example, on Friday we saw the DOW turning down 367 points. Since this represents the risk aversion (money flowing out of stocks to bonds, for example), the USDJPY should go down. But let’s say that we want to protect our position SHORT position since the market has been going up today on Monday 22nd October,but for now, we do not know if this is the real thing or merely a "dead cat" bounce. We have also done our homework and realise that analysts at Daily FX are targeting 111.59 as a target, so we cautiously set 112.00 as our target.

We would then short the USDJPY at 114.13 and purchase a Call option on YUK at 114.50 (expiring on the third Friday of November) at $1. What we have now is effectively a short USDJPY position with a “Stop Loss” of 137 pips. Let's see how this develops and whether indeed our target of 112.00 on the spot will be met.

P/S-I'm currently using Options to play a possible rally on the USDCAD pair. I bought the Nov 98.5 at $0.65, and until now, it hasn't cleared this level after 1.5 weeks. That's the beauty of options, because I would be in deep trouble if I did this using the Spot Forex. This is a speculative position that should yield a quick profit once the USDCAD pair "pops" to the upside, giving us a profit and IV (Implied Volatility) rises. The presence of IVs on Forex Options make them more easier to trade than Stock options, which are susceptible to gap ups and downs.

Chief Shook

LESSON FROM "WALL STREET"

Friday (Oct 19) was the 20th anniversary of Black Monday. And the market really responded by taking out 367 points from the DOW!!! We are fortunate it was not as bad as 20 years ago, although we might be in for a rude awakening this Monday (I think we’re going down, but it will a downtrend in an otherwise bull market). If anybody still remembers, there was also a Movie called “Wall Street”, which was released after Black Monday and depicted the excesses of the 80s. The movie also immortalized the name Gordon Gekko (played by Michael Douglas, who incidentally won the BEST ACTOR Academy Award for his role). Well, Gordon Gekko is now coming back in a sequel to Wall Street titled “Money never Sleeps.” Word has it that this movie will focus on Hedge Funds (it was Corporate raiders using junk bonds in the 1980s). There are sharp lessons on investing to be learned from the portrayal of Gordon Gekko. Here’s the clip.



The lesson is: INVEST ONLY WHEN YOU’RE SURE! And stop throwing darts around (trading for the sake of trading).

Chief Shook

IF THE MARKET GOES DOWN....

I mentioned to my last blog posting (prior to Hari Raya) of the possibility of a Market Crash. Next week will tell whether we’re in for another roller coaster ride ala August 2007. Once again, it could be turbulent until the Fed decides on Interest Rates on Oct. 31st. Does the crash cometh mean we stay out the markets? Nope.

So what do we do if the market tanks (at least in short term)? Here’s what we do:
1. Buy strong stocks at RSI-2 and do covered calls, and set up credit spreads on the weakest ETFs (some weak ones include Russell, Financial Spiders, and Utilities Spiders)
2. Short USDJPY or buy a put option on the Japanese Yen pair (or Short the Yen pair and protect yourself by purchasing a Call option)
3. And if you’re more adventurous (for the experienced), consider buying the EURAUD, which seems to spike when the market is tanking. Here’s the latest chart from DailyFX predicting a rise for the EURAUD. If the market is in for a breather, then we have an Elliot Wave supported by Fundamentals
4. For Malaysian stocks, I’d be in short term mode and look to buy the shares which have rallied recently, looking for a “snapback” once the fear factor diminishes. Some of these stocks are Jaks and Kossan. The rises last week were supported by expectations of growing business (I call it fundamentally based speculation).

Here's the Chart on EURAUD on DailyFX:



Here's the commentary from DailyFX:
"Commentary – The rally from 1.5631-1.6072 is a 5 wave rally, indicating that at leas one more similar rally will occur. In recent weeks, we have showed the long term support line that dates to 1989. As such, the recent turn higher may be a significant one. A small correction is playing out now and fibo support is at the 61.8% of 1.5631-1.6072 at 1.5800. A push through 1.6072 exposes former support (may now be resistance) at 1.6400."

But I’m still bullish overall, although we may need another bailout by Chairman Ben at the end of October. As I mentioned to my broker, we'll have to face and get through a very tough October.

P/S-Fundamentally, if China and India slows down, we’ll be toast! If they go on and grow, there’ll be a big demand for commodities which should fuel the rally for Oil, Steel, Commodities, Drybulk, Aussie dollars, etc. Imagine hundreds of millions of people gravitating to the middle class! The steel and drybulk sectors look good. My calls on Excel and AKS Steel were exercised this month, for a gain of 15.5% and 12.4% respectively. Nice gains on a “conservative” strategy. Go China and India…..

WILL THE MARKET CRASH?

That's what DailyFX thinks. Read it here. And the market charts on the Dow and Nasdaq clearly show a DOUBLE TOP if we do not gap up post Non-Farm Payrolls on Friday. See it for yourself. And we did get a "blowoff top" on the Hang Seng on Tuesday.

Source: Redoption
It's an interesting theory, which says that October is usually a tough month capable to springing up surprises. Let's see if this theory pans out. I really don't care where the thing goes, as I am more of a "hedged" neutral trader.

Tommorrow (Friday) is NFP so the markets will eventually resolve itself and we should be getting some good directional trades. For those of you wondering how to trade the NFP, go here. If if the markets really tank (USD goes up), then it would only be logical to buy the yen all the way down. I'll be revealing my stocks and covered call positions going into tommorrow's NFP so stay tuned.

Chief Shook