SANTA CLAUS RALLY BECKONING?

One thing about the Stock Market is its propensity to surprise people and catch them off guard, bull and bear alike. So just when everything pointed downwards towards a test of 1370 on the S&P (August lows), the Bulls took control and sent the DOW up for the largest two-day consecutive gain in 5 years. The fact that the Index managed to go up the third consecutive day (for a meager 25 points) was extremely significant. If DOW manages to have shallow corrections (or correction by time), then we could see a year end Santa Claus rally, and subsequent January effect. The charts on the S&P500 show the entire picture. We are not smack at the 200-MA, and are attempting a significant crossover. Going up would mean a rosy picture for stocks, Carry trades, and Commodity currencies, which have seemed to lost a bit of their luster as the DOW tanked 10% (normal correction) the past one month or so.
Nothing beats experience when it comes to analyzing the market movements. On the Monday Morning outlook, Bernie Schaeffer (one of the most respected Options traders) had this to say, “My colleagues, Bob Becks and Joseph W. Sunderman, took a look at the implications of a low ISEE call/put ratio (below 90). In their quantitative study, they eliminated signals that occurred within 20 days of the first signal, due to the tendency of these extremely low call/put ratios to occur in clusters. That leaves a total of seven unique signals. Ten trading days after these signals, the SPY has been positive 86% of the time with an average gain of 1.1%. Thirty days out, the SPY was positive 100% of the time, with the average return being 3.2%. The 90-days period following such a signal is really impressive. The SPY was in the black 100% of the time with an average return of 9.1%. Unless we're transitioning to a bear market, which I highly doubt, this study suggests that it's a good time to be long the market, no matter how gut-wrenching it may be on a day-to-day basis.”

The only roadbump I see ahead is the Interest rate announcement on December 11th. It’s likely we’ll be a getting a rate cut. The issue is: Will the market be happy and take us to greater heights, or will disappointment set in and lead us to August lows. It’s all up to Ben now!

Chief Shook

EURUSD 1.50 and USDJPY 106?

The Euro was within a whisker of 1.50 (it was at 1.4966 before backing off over 180 pips) and yen was steadily going towards 107 until the stock market rally stopped it dead in its tracks. But this happened on a Friday after Thanksgiving when the volumes were low, and stops triggered. We’ll see the real stuff the following week and see if the European fort can hold up against the Dollar. Once USDJPY broke down 108.00 on Thursday, the path seemed to be set for 106, but the DOW’s Friday rise put the Yen bulls in check. This looks like a good trade next week, but we’ll have see where the DOW is going (read the previous articles on the state of the Indices and you’ll understand why). (Click on images to enlarge)








Commodity currencies also seem to be following the path of, well, commodities. As the DOW went up 180 pts on Friday, the Aussie followed suit, with GOLD up $20 to $823. On the other hand, USDCAD also went up, as OIL went down. There also seems to be deteriorating fundamentals on the Canadian economy, as the USDCAD soldiers its way up even the DOW goes up.
I must admit I like the EURUSD and USDCAD right now. The EURUSD seems to be holding its own and wants to hit 1.50, while the USDCAD seems to be going the wrong way (which is good!) towards 1.0000 again. Had the DOW tanked on Friday, the USDCAD would probably be there already.

Chief Shook

WHERE TO NEXT?

That seems to be the most appropriate question to ask now. There was a large 360 pts day the last two weeks on Wednesday. Now it looks like a “dead cat” bounce. Trading was light this past Thanksgiving week, with extremely high volatility. The market went down 200 pts on Wednesday and rose 182 points on Friday during the shortened session. Looking at the charts below on the SPY (Spiders), we look precariously close to breaking the 141 level and challenging the 137 level last experienced in August. I’m not committing to options and equity positions until I see tests of these levels and what the does thereafter. Remember, we have to learn to TRADE WHAT WE SEE, and NOT WHAT WE THINK.



To confound matters further, VIX is also giving conflicting signals. Also spikes in VIX above 30 usually signal market bottoms, the spike we got on Nov 12 looks anything but a market bottom. VIX is well supported by the 20 day Moving Average (MA) and the Trendline which is drawn in on chart shown. An uptrending VIX has a “bearish” bias. This however could be good for FOREX trades – Yen and US Dollar strengthening. In fact, this is what we have been seeing. Only the EURO “anti dollar” is defying the trend.

The question is: With all the pundits waiting for the markets to test the August lows, the market could just go up and defy logic, leaving all the bears in the dust again. Isn’t that what the market is good at anyway?

ChiefShook

OPTIONS EXPIRATION WEEK

This post was supposed to be up Sunday night, but got delayed since my network went haywire. Lets discuss where we are, taking into account of what happened Monday night.
1. This week is Options Expiration Week, meaning that there can be some wild action, so please look for Hammers or Bullish Engulfing patterns for quick rebounds from the depths. If the market fails to recover in the early part of the week, there will be accelerated selling as Put sellers short the futures to maintain a neutral position.
2. Here's the chart of the DIA.

It's retreated 1,000 points from the high as of Monday night. If you look in August, it was when we retreated 1,000 points that we recovered through that the nice hammer. So are we going to get a hammer or bullish engulfing pattern here?
3. The SPY broke support of 144.95 in yesterday's sessions and could be heading lower to test its August lows, if it doesn't make a turnaround soon. This means the Dow could go down a full 300 points lower (Scary but plausible).
4. We'll have to see signals of a genuine bear market before altering any strategies. In the meantime, look for carry unwindings to short the Yen pairs. If you're not into shorting, then buy EURAUD as was recommended before.

For Forex traders, I'd wait for a solid rebound on the Dow before committing long positions on market beta currencies such as long Aussie, Loonie (Commodity Currencies) or long EuroYen and USDYen. With VIX in the higher 20s, things could be like a roller coaster. Already today, just before the market open, the Aussie and EuroYen were going up. Last week, on Friday, these currencies retreating spelt trouble on the Dow later that night. So will the uptrend today portend a recovery on the Dow, especially after a 680-point mauling the past 4 trading sessions? Let's wait and see.....

Rgrds,
Chief Shook

Revenge of the BEAR

After being in hibernation, the dreaded bear has reared its ugly head again. And as I've said before, there's one "market", so everyone was affected:
1. The DOW tumbled 360 points on Wednesday, and carnage has not been abating. It started with Citibank announcing large provisions for subprime losses last weekend ($8b - $11b). Today (Friday), Wachovia owns up ($1.1 billion write down).
2. The US Dollar, which was on a freefall early in the week as Oil made its march towards $100 per barrel, has been coming back with a vengeance. It has retraced also 350 pips against the Canadian dollar (which is levered to Oil); similarly, the Aussie, which touched 0.9400 after the RAB raised interest rates (must be an expensive country, eh?), went down 250 pips. Only the EURO has been spared (another record high today at 1.4750), although it has retraced a teeny weeny bit after setting the record high. Could it because the EURO is a safe haven?
3. Technology stocks, once the darlings of the market and thought to be shielded from the subprime woes, are imploding. The QQQQ ETF has gone down from almost 54.5 to 50. Cisco started the rout by being voicing concerns on the future, ala Caterpillar a few weeks ago.
4. The financials sector (represented by the XLF ETF which stands for Financial Select Spider), continues to get pounded.....and to make it a complete day, it was reported that Mizuho Securities has over Yen 100billion is subprime losses. Seems the contagion is spreading.

I normally do credit spreads this time round, but seeing the high VIX, I'm avoiding them for this Options Expiration week. Rather, I'm looking on selling more Calls against my stock positions.

Next week is Options Expiration week, which will give us clear directional bias. I'd just sit on the sidelines and see how the Dow behaves tonight. We'll either have the following next week:
1. Carry Trade Unwinding (Yen goes up and the financial markets go down)
2. Market going up due to an Options Expiration push above key market levels (in order to render large "Put Options" positions worthless). Under this scenario, the EURO will likely continue its march towards 1.50, as the strength in the EURUSD pair is extremely surprising. It was the last one to break down today. (and even then, it was a small move, and not a "breakdown").

Here's how it goes....The fundamentals clearly favour a weaker dollar. But the US markets are hoping that the Fed lowers interest rates again this December. But the Fed may not be able to do that due to inflationary pressures. The markets were clearly upset when Chairman Ben failed to assure them of this. Hence, we are seeing a return to Risk Aversion. This results in the Yen and US Dollar going up. And the Carry trade unwinding will put pressure the most on commodity pairs such as the Aussie, Kiwi, and Loonie.

Up or Down? You tell me.....It was down last month, up the month before, and down before that. Get ready and fasten your seatbelts!

Chief Shook

GOOGLE IS COMING TO BURSA MALAYSIA!

It was noted in the The Star reported on Friday (November 2nd) that OSK will issue Call Warrants on GOOGLE (yes, that GOOGLE, which is about the best company on earth, although I’m putting my money in VM Ware, thank you). The Call Warrants will have an exercise price of US$680. Since Google is now at US$707, the price of the call warrant could range from anywhere between US$40 and above. At about RM140 per call warrant, even 1,000 shares would cost a whopping RM140K! But it seems our friends at OSK have found a creative way to make this instrument cheaper. You will need 3,000 call warrants to convert into 1 Google share. This gives a reference price for the Call Warrant around 0.11 (11 cents), or saying that Google has to move beyond US$778 to make the Call Warrant profitable. No wonder they're saying the share$850!

Being a Call Warrant, there is extreme Volatility involved. Thus, it is important that when trading this new instrument, we use the same strategies that will be used when buying a Call Option on Google. Look at Google’s chart. It’s obvious that Google is on a tear, only seeing occasional pauses at the 10-Day moving average and when RSI-2 becomes “oversold.” Looking at this chart, Google would make a good candidate for a run-up to Earnings in 2008. But being in Malaysia, the speculators will probably run this up as if there’s no tomorrow! Lets see how ridiculous it gets. For the record, Google has not performed well from November to April, netting a loss of -1.54% from 2006 to 2007. Conversely, it netted gains of 13.84% for May-Oct 2006 and 43.11% for May-Oct 2007.

This invasion of foreign Call Warrants is actually good for the local markets, as it allows us locals to invest in global growth from Malaysia. Hopefully, Google is the start of a wave of "hot" companies from the USA (especially tech stalwarts who are leading the Web 2.0 pack). The Chinese invasion has of course been on our shores for quite sometime, with household names such as Petrochina and China Mobile. Check out the charts for yourself on Stockcharts.


Chief Shook

CROCODILE HUNTERS SLAY CROCS

Why is it dangerous to go headlong into Earnings announcement with a stock that ascending vertically? Here's why: (Charts for stockcharts.com)

Crocs makes one of most trendiest and MOST EXPENSIVE sandals on the planet. Look at them. Cool, eh? And they have a wide range of choices to cater for kids so we parents have money to spend on. But investors of Crocs surely must be feeling the world is against the reptile nowadays. After announcing recent earnings, Crocs fell off a cliff (look the charts above), to the tune of 35%. WOW! It was not about current years earnings, but rather about future guidance which disappointed investors (they might be thinking that this is the end of fad, especially with the growth of Crocs imitators.....Who can blame them? Even I bought a Crocs "imitation" which was 30% the price of the original thing! Doesn't look as good though, I might admit).

This shows the dangers of going headlong into an Event Risk with positions, especially if they are inadequately protected. The plunge would make any Crocodile Hunter proud! Btw, Crocs’ Board has approved a share buyback for 1 million shares…..for obvious reasons (but this is really "chicken feed" compared to EMC's $2 bln buyback, or Allegheny Technology's $500m buyback). Hope we’ll still have the Crocs fad, because apart from breaking my wallet (for the kids), the shoes really look cool, don’t you think? I mean, just look at those shoes. (from the Crocs site, of course)

Chief Shook