Bull/Bear conflict resolves to the down side

S&P500 has recently lost gains previously made in the months of April and May. News that the Federal Reserve may or may not have another QE program was catching peoples attention and fears of a recession in China also is pushing down commodities. I previously wrote that when the triangle or flag shaped pattern resolved, there would be a notable move. It was a tricky resolution because it looked like the market broke out to the upside, and the bulls were going to, for the 5,444,444,444th time, cause another V shaped move in the stock market. But no, it was a head fake and, Wednesday June 1st was a rare day in the market (people in the market were selling on bad news, after weeks on weeks of bad news, it now matters). And now the bears have the control.

Closing price more important than intraday low/high

A few weeks ago I highlighted a potential trade opportunity in DCTH.

I said:

If I was to purchase a substantial amount of DCTH here I would hold it if the closing price sustains $5.35. I would need to sell it if it ever closed below $5.35, even by a penny or two.

On June 3rd, 2011, DCTH closed at $5.38. The next trading day, June 6th, DCTH hit a low of $4.90 and then went on to touch $5.90. That is a 20% swing in price from bottom to top. The stock ended up closing at $5.70. Lets take a look at the chart that illustrates this dramatic move in price.

There is value at $4.90 all the way to $5.50, aside from some short sellers getting blown out, there was substantial buying and selling present in that price range. The more the volume is, the more value at that price. I don’t expect DCTH to stay at this level for too much longer.

S&P500, Bull & Bear conflict soon to be resolved

Low risk/high reward set up with DCTH

The most important question you should ask yourself before making an investment is- “How much will I lose if I am wrong?”.

Defining your risk is having absolute control of your investment. You should never say to yourself “I could make so and so much.” That is being emotional and irrational. No one knows how much the stock price of xyz stock is going to go up or down. All you can do is control the risk by knowing how much you can lose if you are wrong. And when you are right, making money feels so easy.

DCTH has a Low Risk/High Reward set up and I will show you how you can play it.

DCTH one year daily chart

DCTH’s one year low is $5.35 but is at $5.92 as I am writing this. Yesterday it made a move down to $5.65 and that did not last long. What is the risk here? The risk is about 60 cents. Yesterday it was even lower at about 30 cents. So in just one day the risk of this investment doubled. If I was to purchase a substantial amount of DCTH here I would hold it if the closing price sustains $5.35. I would need to sell it if it ever closed below $5.35, even by a penny or two. In order to be a winner in trading you must remain disciplined and patient. Both are key to a successful outcome.

Early Stages of a Market Top, Says Ned Davis

via MarketWatch:

• The stock market sectors that typically shine during the last months of a bull market are doing quite well these days, thank you. And at least some of the sectors that typically do poorly in such months are struggling.
• The researchers focused on performance over the last three months of each bull market in the U.S. stock market since the early 1970s. During each of these periods, they measured the performance of the 11 sectors within the S&P 500 index.
• Their finding: “Financials and Utilities have tended to underperform in the months leading up to bull market peaks, while Consumer Discretionary and Consumer Staples have outperformed.”
• How do the last few months stack up against these historical precedents? Unfortunately, in 3 out of these 4 cases, the sectors’ recent performance is consistent with a top being formed.

SPDR Health Care (XLV)

XLV TOP HOLDINGS

Company name	% Net assets
Johnson & Johnson	12.82%
Pfizer Inc.	11.95%
Merck & Co, Inc.	7.91%
Abbott Laboratories	4.87%
Unitedhealth Group, Inc.	3.87%
Amgen, Inc.	3.78%
Bristol-Myers Squibb Company	3.43%
Medtronic, Inc.	3.20%
Eli Lilly and Company	2.69%
Baxter International Inc.	2.39%
Percentage of holdings 56.91%

SPDR Consumer Staples (XLP) (consumer non-discretionary)

XLP TOP HOLDINGS

Company name	% Net assets
Procter & Gamble Company	14.41%
Philip Morris International, Inc.	9.90%
Wal-Mart Stores, Inc.	8.54%
Coca-Cola Company	7.19%
Kraft Foods, Inc.	4.66%
Altria Group Inc.	4.45%
CVS Caremark Corp	4.40%
PepsiCo, Inc.	4.35%
Colgate-Palmolive Company	3.61%
Walgreen Company	3.31%
Percentage of holdings 64.82%

SPDR Utilities (XLU)

My thoughts: It is interesting that these names have been outperforming since March/April. I believe fund managers are rotating into these safe sectors for capital preservation. Most of the leaders in the stock market since September/November 2010 have been getting beaten down very hard, look at SLV (silver ETF).

The Fed’s Treasury program is coming to an end in June, which historically means that risk assets will fall soon after that occurs. (look back at the QE 1 & 2 in Japan’s history) But I am a firm believer that this is the most dovish (opposite of hawkish) Fed in history and they will have as many QEs as there are sequels to the movie SAW and every single one will be more distasteful than the last.

In other news events, that may or may not put a bottom in this leg down in the market, (haha, can i even call it that – a leg down). Anyways, we have accelerating negative news about the European sovereign debt crisis, and about the United States debt ceiling. The question always is, IS THIS PRICED IN? We will find out in the next few weeks.

Now on to Financials, which have been underperforming. If the Fed keeps printing there is something certain coming down the road. Ready? Ready. INFLATION, and the type of inflation that will make you and every one around you a millionaire! Banks don’t do well in inflationary environments, especially when inflation is as massive as I think it will be. You know what else hinders growth in banking operations? REGULATION. So banks have both inflation and regulation down the road…

… And we’re open!

Low volume melt up in a picture

Unless you are invested in a broad range of securities, especially ones that track futures prices, it’s hard to make consistent gains in this market. A lot of the move up the past two years has been in the futures market, during the time when the US stock market is closes. It doesn’t take much gunpowder to move markets when they are closed. There just aren’t many players at the time. So buy every and any dip because it seems to be the only game in town. Here is a picture of the melt up, with ever decreasing volume. One can debunk this theory by arguing that the markets are trading the same dollar value, because when prices go up, the volume will go down. How high will we go?

Flash Crash One Year Anniversary

EUR falling off; USD gaining strength to start 2011

A happy 2011 has started and market participants have just finished off a rehabilitating week after all those holiday excesses. Its officially been 1 full year that I have been trading and I am grateful for everything I still have in my life, . Truthfully, I had my best trading days in 2010 and my worst too. I am still in the markets everyday, even though I have not been documenting my performance. I assure you that all my trading days are on file and I will introduce a more consolidated form of performance measuring for the new year. Now lets get to business!

Euro debt fears are rising again and as the saying goes “bears make headlines”, I would  like to add that they make money too.

Lower 120s looks to be the next pit stop in FXE. In other words short the euro. After Greece and Ireland sought European Union bailout, bonds of Portugal, Spain and Italy lost a boatload of value last year. To make matters worse, the new year starts off with weakness in these same bonds. This does not bode well for the euro. I guess it is true, PIIGS get slaughtered.

I will keep EUO on my radar so I can trade the euro’s fall.

THE DOLLER

The dollar, to the euro’s dismay, has been strong and rising. When QE2 came around, it was believed by the masses that the dollar would absolutely get killed, but recent euro bond fears have investors running for dollar safe haven; can you believe this irony?

While this may be good for the dollar, its bad for export majors in the States. A stronger dollar also signifies a move from risk on mode, to a risk off mode. If you recall we went through weeks mid 2010, where every day was either risk on, or risk off; I am starting to sound like Market Miyagi . It does not look good for risk assets, and the last two days of the week the stock market was acting weak. What is going to happen when the retail crown, and even all the half brained fund managers realize that the market can fall, indeed it will fall again. I expect people to start acting more risk averse, with aggressive stop loss orders, and tight risk management. This just means my jobs going to get a lot tougher. I need to be very careful with my stock pickings. I’ve started a watch list for closed end funds trading less than NAV (net asset value). I will be keeping my eye on top tier high yield income funds. I am going to put in the extra work this year and make it an amazing one in terms of financial growth and on a personal level too. Good trading in 2011!

July cummulative trading results +1,641.16

july 6 trading screen +19.50

july 7 trading screen +44

july 13 trading screen +355.11

july 15 trading screen +220.08

july 20 trading screen +210.71

july 21 trading screen +443.53

july 28 trading screen +72.50

july 29 trading screen +200.90

july 30 trading screen +70.83

BOOK OF TRADES

July 6 trades 1

July 6 trades 2

July 6 trades 3

July 7 trades 1

July 7 trades 2

July 7 trades 3

July 13 trades 1

July 13 trades 2

July 15 trades 1

July 15 trades 2

July 20 trades 1

July 20 trades 2

July 21 trades 1

July 21 trades 2

July 29 trades 1

July 29 trades 2

For the non-believers (Technical Analysis)

If you don’t believe in technical analysis and you are a market participant; you and your money wont stay together for much longer. Look at these two charts below. I made the first one after Wednesday’s close and the second chart I made after Thursday’s close. Perfect bounce off the 38.2% retracement level.

HAPPY INDEPENDENCE DAY U.S.A. !