Saturday, January 26, 2008


Probability model for the Russell 2000 seems to confirm our thinking on an intermediate term rally of some substance.

Blue bars are current market

Black are Markets History

This model also shows a test of the lows (not on this chart) after the rally is complete.

While we saw some profit taking on Friday, it did not take us by surprise as we were looking for the higher opening to complete the first micro short term up trend.

It is very possible that we saw all of the corrective forces we were going to see on Friday as the market was able to achieve a little more than a 38% correction. There is still the possibility of a 50 or 62% correction, but should this be the case it will afford us the luxury of adding to our equity exposure.

Friday, January 25, 2008


I thought I would start out this weekends update with a very interesting occurrence that is based on bullish sentiment levels and has shown some very consistent results.

Over 10 years, the sentiment level on the S&P 500 has dipped below 20% three times, not including the most recent move below 20 we had last week.

Each time this occurrence has happened and the sentiment turns back up as it did this week, the S&P 500 has rallied 24% from low to high. This would bring the index back to its all time highs at 1574 so this would hardly be considered a remote incident.

This is yet another indication of an intermediate term low having been put into place.

There is also another very interesting pattern that takes place in this situation and you can see it on the chart below.

Marked by the blue lines are when the sentiment turned up from below 20%.
The 24% number is the rally from low to high that materialized.

Now, after the 24% rally had run its course, what did the market do next!

Well, in two of the occurrences the market went on to make another new low and in the last incident, the market tested the lows and came very very close to the low level.

So, if things are to pan out much the way this pattern dictates then we should be in a fairly sizable rally phase, but know that once this rally phase is over with a move back up to the old highs that the market has a very high probability of moving sharply lower yet again.

We are starting to get some weekly confirmations of an intermediate term bottom being put into place, with the Russell 2000 giving a weekly buy signal on the stochastics.

Notice also the red line at the bottom of the chart which shows small speculators selling short like no tomorrow and we know that the little guys are typically very wrong at major turning points.

If this intermediate term low holds and continues to be confirmed then look for the Russell 2000 to lead the pack in performance.

The Mid Cap 400 has some of the same characteristics of the Russell 2000 so it looks to me like this next move higher will be led by the smaller companies.

The S&P 500 weekly did not give a weekly buy signal on the stochastics, but the RSI gave a very strong indication of a major low being put into place.

Thursday, January 24, 2008


The NASDAQ gave its confirmation of an intermediate term bottom today with the turning up of the fast line on the MACD.

Much like the S&P 500, the stochastics broke out today and confirmed a short term low at the very least.

Ultra short term, the put call ratio gave a caution signal today for short term long positions.
It did not give an all out short term sell but it is cautioning short term traders from overstaying their welcome.

Friday looks like it could be a consolidation day as the market has moved sharply higher from its most recent lows and the intra-day charts are starting to show a market structure that might need one last push higher or a turn lower.

Either way, Ultra short term traders should be looking to take some profits here.

Intermediate term traders can look to add to their allocations on any pull backs.

We currently have a 60% allocation to stocks and as long as things continue to look constructive, we will be bumping this allocation higher as opportunities present themselves.

So in a nutshell we have:

Short Term Traders - Take Profits or Tighten Your Stops Considerably
Intermediate Term Traders - Use Weakness To Increase Equity Exposure.

Wednesday, January 23, 2008


Aggressive Buy Signal On Cattle.

We are long April Cattle from 93.750.

Protective Stop at 93.250 on a close only.

We have a very handsome profit on our cotton trade with an average cost of 71 1/2

We have moved the stop down to protect 50% of our profit.

Any further decline and the stop will be adjusted down accordingly.
We had a Bearish MACD cross today so it looks like lower prices for Cotton

Sugar gave us our entry signal.

We are short The march contract from 11.99


We still have yet to get our Holy Grail sentiment indicator to turn up so we still will not go above 50% on the allocation to stocks.

The moment this indicator confirms the new upward thrust I will alert all of you and then we can begin to do some real buying.

The chart below has some interesting points on it.

By the way, if you have not checked out the Day Trading Blog at
then come take a look.

We have been doing quite well and sometimes we need only trade a couple hours a day and a few days a week.

p.s. Please remember to click on the BlogElites icon in the upper right had corner and vote the blog. Thanks.


You certainly cannot accuse the markets of being boring right now as volatility continues the dominant theme.

Today was not exactly what we had anticipated as we thought the market would rally right from the word go and not look back. The FTSE overnight took care of that scenario for us as the market got hammered early again.

The pattern we got today though is actually more bullish than had we gotten what I had anticipated, plus it afforded us yet another opportunity to increase our equity exposure.

A double back to back reversal pattern.
Not a very common pattern, but when it comes around it is exceedingly bullish.

I also like the put/call ratio remaining bearish during the course of the entire day.

It shows that most investors do not trust the reversal days and they continue to wait for the other shoe to drop. This is very bullish and a trend in this direction will support the market at higher prices.

Put/Call model generates a buy signal with the higher high followed by the turning down of the indicator.

We will have to watch this indicator very closely as the market rallies to get a feel for the sentiment of the market.

The rally after the August 2007 low was met with heavy call buying and sent up a red flag about the markets ability to hold onto the gains it managed to put together through October 2007.

We do not want to see a repeat of this action this time around, otherwise we may just be looking at a counter trend rally in a bear market. Obviously there will be more to judging the rally than just one indicator, but this is an important one.

Tuesday, January 22, 2008

A Look At China and The Shanghai Composite

The Shanghai market has made a vast amount of people some very good money.

It seems that everywhere you turn you here this pundit and that pundit talking about all the

opportunities in China and how these opportunities have just started to be tapped.

All of this is true, it was never a question of the long term viability of china's developing into the 21st century.

The question is..... Are the current valuations in Chinese companies in line with their fundamentals? Is the Chinese Market Overvalued?

These questions I really cannot answer because what is going on in China and how it is unfolding is a rather new event.
I do know this though. Through all of this time, there really has not been a strong hiccup in prices. You know, those scare declines that make everybody think the bubble has burst and the world is coming to an end.
Sure, the Chinese market has had a 10% correction here and a 10% correction there, but really nothing on the panic side. We know from past markets, whether foreign or domestic, that panics are all part of the system and actually are a necessary evil to keep thing balanced.
If you look at the current chart of the Shanghai Composite and then the S&P 500 in 1987, you see a rather eerie correlation between the two. It is not perfect, but the general structure seems to fit very well.
So what does this all boil down too?
Well, if I have a heavy exposure to Chinese stocks, I would certainly decrease my allocation considerably, perhaps get out of them altogether.
Then wait for the potential meltdown in prices and jump back aboard.
What about the effect this would have on our markets here at home.

Notice that the fallout from a debacle in the Chinese market typically only has a very short term effect on our markets. Sometimes our market just shrugs it off completely.
However, if the Shanghai is to decline in the manner that our equity markets declined in 1987, we would be foolish to think that there would be no carryover into out indexes.
However, I think the spill over will be very limited, 3-5% and being as Chinese stocks should be on the order of a fairly quick recovery (3-5 months), our markets should be able to whether the storm. It may just coincide with a test of the most recent lows in the S&P 500, but time will have to be the judge on that one.
Personally, my exposure to Chinese stocks at this writing is a big fat goose egg.
To much correlation for me and to much current risk.
There are better places to put your money right now, like right here at home.

MENT - All Aboard!!

MENT is just begging to move higher, so by all means let us listen to what it tells us and buy some stock outright and leverage it with call options.


The blue bars reflect the current market and the black bars represent the predictive model.

A picture is worth 1000's of words!!




AMD - Following The Pattern To A Tee

Today's swing high in AMD fits very nicely into the model and at this point we are looking for
both a place to get long the stock again and buy call options.

I will be looking for $6.39 to begin the buying process again and I look for this to occur over the next 3-4 days. If the stock follows this pattern then look out on the upside because it will be about ready to explode.

Stay Tuned!

ANAD - One Day Completion of 5 Days Expected

ANAD completed what appears to be a brief corrective phase early this morning and then resumed its rally.

The model continues to call for sharply higher prices for the stock.

Being as busy as I was this morning with the market action actually ended up being a blessing in disguise as I was unable to do anything with both the option positions and the stock.

The stock is up 16% from our purchase and the volatility today really helped out the call options.

If we get a strong rally day tomorrow I will be taking half the position off the table with a tidy profit and let the other half ride. Of course even though we let the other half ride, we still need to manage the trade as though it was whole.


Today played out pretty much the way we had anticipated with the panic sellers dumping everything they could get their hands on in the first 5 minutes of trading.

The reversal day I spoke about yesterday like the reversal day in August 2007 also came to be.

We also have some serious mathematical ratios in play here as everything seems to be panning out to the most likely scenario of this panic low put in today being a major intermediate term low in the market.

If this is going to be the case, then we will know shortly, as tomorrow the market should have a very nice rally and the equity indexes should form a morning star pattern.

Should this occur, it will be strong confirmation of an intermediate term low and a call for an increase in our equity exposure.

The heavy put buying today, even as the market moved sharply higher off the panic lows is indicative of a large amount of fear in the market and the longer we can keep that fear or even dis-belief of anything constructive on the upside, then the longer the market can move higher.

Make sure you take a look at todays chart as it really shows the true picture.

Monday, January 21, 2008


The overseas markets are getting hammered yet again tonight and the Globex S&P 500 futures are down a whopping 62 points, which translates into over 500 points on the Dow.

If we had not an idea that these prices had a possibility of being reached then we might be worried, even panicked.

However, times like these offer points of purchasing good quality equity issues that have been battered down to bargain prices. With only a 40% current equity exposure we are in the very enviable position of taking off the hands of the panic sellers these quality equity issues at a fraction of their intrinsic values.

While the majority of market players have been lightening their equity loads the whole way down, we have been in a very good position of mostly cash and hedged for 60-70% of the decline.

The question arises as to whether or not we removed our bearish hedge too soon and to that I certainly cannot answer anything but yes we did. However, by sidestepping 70% of declining prices and then only going back into equities by 40% we are in a very good position to capitalize on these current market imbalances.

Those who choose to unload their stocks at this point in time will in all likelihood be doing so at the bottom as investors have been doing since the start of openly traded markets. These mistakes get repeated over and over and it is up to us to take full advantage of such situations.

So if you are one of the many who has held fast to your 100% equity exposure through this entire decline please don't compound the problem by unloading stocks right at a bottom.

Instead, embrace this as an opportunity to perhaps shift some of your positions into stocks that will recover more quickly when the inevitable low is put into place and stock begin their long term rise yet again.

Know that these times of turbulance in the financial markets give birth to a renewed upward bias in stock prices and without these normal periods of declining prices coupled with panic and the world coming to an end, the markets would be sure to cause long term pain on most investors.


I realize that is not a very pretty way of looking at things and I am sure there was a more diplomatic way of phrasing this idea, but it has always been the blunt and coarse nature of this saying that has kept it in my mind always.

So, enough of the lecture already.


Sunday, January 20, 2008


The last leg of this decline is equal in length to the first leg of the decline which should be a good place to engineer a change in trend.

This last leg has also been almost text book on a structure basis with all the earmarks of the final push lower.

Our long term model on GGP officially gave the green light this week-end when I did my work so look to enter the stock sometime on Tuesday. Use 29 5/8 as your protective stop loss.

For those so inclined to use leverage to trade GGP, as I always am, you can look to call options or if you wish to play the stock on a longer term basis you can look towards the LEAPS.

The April 35 calls are valued at 2.70 and currently trade 2.60/2.80 so you should not have a problem getting them at fair value. Stop loss of 29 5/8 on the stock puts your risk on the April 35 calls at 1.38 or 48%

Those of you who feel more comfortable with being in the money, the April 30 calls are valued at 5.61 and currently trade 5.50/5.75 so you have the same opportunity there. Having a stop loss on the stock at 29 5/8 puts your risk on the April 30 calls at 3.55 or 36%

To me, these are both unacceptable stop loss levels on these options, so while the outright stock purchaser can set their stop at 29 5/8, the option or leap trader should tighten that stop loss level upwards considerably. I will not lose over 25% on any option trade as I have found that anything past that level tends to forecast trouble.

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