Weekend Market Outlook - 5/18/2008

The weekly chart of the SPY which is a stock traded to mirror the returns of the S&P 500 continues its bearish volume pattern as shares trading hands continue to dry up more and more the higher we go. This is NOT the sign of a healthy market and is a very genuine concern for me.



This development alone has about 70% input into my current bearish 45% equity allocation, and until this trend makes an attempt to shift into a positive direction I will continue to scale back my exposure to stocks.

As much as I am trying to remain optimistic about the future course of stock prices, I am really starting to see some credible signs that this rally off the lows is nothing more than a counter trend rally in a bear market.

Next week bring us the post option expiration week and as you can see by the chart below, it tends to have a negative trend with the exception of Wednesday.

However, based upon the market pattern on Friday, the odds favor a fairly strong rally on Monday that should quickly be followed by lower prices. You will notice on the chart below that Monday carries with it a very minimal negative return and recently the daily patterns have been very accurate.

On the subject of the daily patterns, the pattern on Friday Inverted in the Morning, but almost on the nose in the 1:08pm time frame, the market began a fairly decent sell off. Unfortunately there was not enough downward pressure to keep pushing prices lower and buyers came into the market and sent the futures higher. This led to a break even trade on selling the 1pm time frame and we remained flat the rest of the day as option expiration day can be very unpredictable and I did not want to get caught on the wrong side of the market and turn a break even day into a losing day.

These daily patterns that I have been following as I said, have been quite accurate and a fairly good guide for those of you who want to grab a slice of the intra-day Price movements.

Monday calls for higher prices.

The ideal pattern for Monday is a flat opening followed by some very modest weakness for the first 5 to 10 minutes. This should be followed by a nice upward move into the 1:15pm time frame at which time the market could enter a consolidation zone and chop around at these higher prices until about 3:40pm at which time the rally should resume into the close. Monday is slated to close at the very high end of its trading range so aggressive short term traders should be looking to establish long positions on any type of weakness we may encounter.

The chart below illustrates both the probability of an up or down close as well as an average return. Next week covers day 13, 14, 15, 16, and 17 and the chart explains the rest quite clearly, showing Monday being a decent up day, but soon to be followed by weakness for the rest of the week.

By the way, these charts were taken off the www. SentimenTrader.com website and I encourage all of you to take a look at it. It is a very good site that has much to offer that is hard to find anywhere else.

First Marblehead - Fire Sale Prices

Our economic cycles are filled with Boom and Bust cycles and spread across different industries at different times. This has been going on since the start of capitalism and will continue into the future as well. The only change we have really seen in this cycle is the length of time in between cycles has increased and the recovery time has decreased, both factors are a net plus for investors.

With this in mind, I bring to your attention First Marblehead Corporation which is the largest
issuing agent of student loans.

Now I realize that currently any company with anything to do with the credit markets is considered taboo and as you can plainly see by the stock chart, the investors feel the same way. However, this to shall pass and FMD will survive both the current credit crisis as well as the class action lawsuit that investors have filed based upon the stock plummeting. With this recovery will come a stock price that will very easily increase 10 fold and investors who really see the value in this company will be very handsomely rewarded.

Is there risk involved with this purchase? Of course there is risk, there is always risk, but with the companies finances and the stock price hovering just above $3 per share, the potential rewards far out weigh the risk and as far as I am concerned warrant a very aggressive accumulation phase in portfolios.

LXU - Up Up and Away

LXU continues it rally out of the Wedge break.

I continue to await a pullback in order to determine whether or not a re-purchase would be prudent.

For those of you that took 1/2 your position off the table at 17 1/4 and let the other half ride, you might entertain tightening your stop probably to 18 1/2. This will lock in a very nice 34% return for you.

I am keeping tabs on the stock and should another purchase warrant consideration I will alert all of you to the action.

Interesting Correlation

Below are 2 weekly charts of the NASDAQ cash index.
The first chart is the major low that was put into place in 2003 and the second chart is the current low and subsequent rally.

You will notice quite a few similarities of the two patterns all the way down to both of them being 9 weeks long from ultimate low to ultimate high and both rallies being stalled out by the upper Bollinger Band.

If the market were to follow this current pattern on a weekly basis, then we could expect a sizable pullback from here. The bullish tone to this pattern is that once the pullback of 62% was completed we entered into a very strong rally phase that carried stock prices markedly higher.

One thing at a time though as we need first to see if indeed the market stalls at the current Bollinger band which held the market back this week and we are brushing up against as of this Friday.

I will be posting my Weekend Commentary later, I just thought there was an interesting correlation here and I wanted to bring it to your attention.

Remain Short Soybeans, New Positions Can Be Opened On The Short Side

I continue to hold Soybeans short with a very modest paper loss.
The beans continue no look and act, like a bad accident just waiting to happen.

I have a $750 flat stop per contract on a closing basis only.

If you did not take the short trade before, then the beans are offering you yet another opportunity to get on board and at a better price I may add.

As always don't forget to put a stop loss in place to protect your capital should things go terrible wrong.

Equity Market Comment - 5/15/2008

Todays market action was quite the contrary to what I had anticipated and once again the stop loss on my short positions and put options save me from a much larger loss on the day.

All of this volatility this week is no doubt relating to option expiration with the sharp reversal near the end of the day Wednesday and the breakout higher today.

I must admit, it is a fairly bullish sign with the S&P 500 futures closing above 1421.50 which was the breakout point. The question now is can we get any follow through from this breakout. The bullish indications with the close above 1421.50 will be quickly reversed should we close back below 1421.50 in the next couple of days.

The day to day sequencing pattern for short term traders calls for a flat to lower open followed by early weakness in the first hour. This may be followed by a general firming of prices from 10:30AM to 1:00PM. After 1pm however I will be looking to be a very aggressive seller of this market, especially if we start to see some technical breakdowns at that time. So for Friday, aggressive traders would best be served to wait for the last half of the day and see if in fact a large decline is in the making.

On the intermediate term front I continue to allocate a bearish 45% to equities and I continue to expect a decline of sorts in the very near future.

Remain defensive!!!!!

Equity Market Comment - May 14, 2008

The market is nice enough to send us clues along its journey, it is simply up to us to find them and capitalize on them.

While the breakdown has taken more time than I had anticipated, the rally and then failure today has changed nothing. As a matter of fact, in a way it has strengthened the outlook for lower prices as a day of very strong buying early (Small Investors) turned into some very strong late day (Institutional Investors) selling.

Actually yet another good lesson here that many of you might not be aware of.

The first part of the day 9:30 to 11:30 is mostly comprised of small investors trading their portfolios so as a general rule we can look at early trading as a counter move to what the future could hold. 2:00 to 4:15 pm is the time of the Big Boys and the smart money as they unwind their positions that they either bought from or sold to the early morning small investors. Take a look at a 5 minute chart sometime and you will see this pattern occur over and over again.

Today was yet another banner day for call buyers as the put/call ratio continues to decline into an area that is quite indicative of market peaks.

Intermediate and Long Term investors need to remain very cautious here and short term traders can look for short selling candidates and index put options.

EQUITY MARKET COMMENT - 5/13/08

The call buying continues as a furious pace as the small investors continue to get on board what they see as "The New Bull Market". As I mentioned yesterday, this process continues to send a negative message about the underlying health of equity prices and you need to adjust your portfolio accordingly.


It seems as though everyday we are given yet another piece of evidence as to the true underlying trend of the market. Take a look at the Hourly chart below and you will see a market that currently teeters on the brink of what may perhaps be a very steep correction, if not a steep new leg lower in a bear market.

Nothing new here.
Just the same message to remain very defensive in your equity exposure.
Remember also that if the daily stochastics on the S&P 500 cash turn down in the next day or two that it should be an excellent opportunity to get on board with put options.

The market today did not really follow the pattern my work has indicated, but obviously it is the work that is incorrect and NOT the market, the market is ALWAYS right!

Even though the seasonal prediction got a bit off track today it still does not change the current bearish outlook for stock prices. With this in mind, Aggressive Short Term Option traders can continue to look at entering SPY put options. As of early today, all of your call options should have been sold and if you did not have the opportunity to purchase puts we will have another opportunity tomorrow. I will post the specifics for short term traders later this evening.

I WELCOME THE COMPETITIVE NATURE DEVELOPING IN BLOG ELITES

Well once again I need your help in securing the number 2 spot in the Blog Elites Rankings.

It has really become quite competitive with quite a few of the tracked blogs springing to life and moving up the rankings.

So if you could please click on the BlogElites link just to the right of this post, enter and vote for Trend Analysis LLC I would greatly appreciate it.

The higher my ranking the greater my exposure.
The greater my exposure the more ideas I get from readers.
The more ideas I get from readers the more cutting edge our trading becomes.
The more cutting edge our trading becomes the more money we make.

I think you get the idea!

So please take a few minutes and throw a vote my way and if you get these updates via email, please take the time to visit the blog each day and cast your vote.

As always I appreciate your readership and thank you for your vote!

Simply More Evidence As To Why A Light Allocation To Equities Is The Prudent Thing To Do

Below is a chart of the 10 Year Note yield with the S&P 500 cash index placed over it.

Equity prices are represented by the dotted blue line and yields are the candlestick chart.

What I want you to get out of this visual is the clear linking of interest rates to stock prices at the current time.

It is abundantly clear that as go interest rates so go stock prices and the yield on the 10 year note from a technical standpoint is looking to work lower and in all likelihood will bring stock prices along with it. The question remains as to whether or not this will be a corrective mode from the low at 1260, which would keep 1260 in tact or if this decline may be the start of a new leg lower.

I am taking no chances either way, as I currently recommend a very bearish 45% allocation to equities and a finger on the trigger to hedge 100% of stock portfolios with options should we get a confirmation that we are in fact in a new leg lower. Either way we are very well protected from a move lower in stock prices. There are simply to many investors out there who firmly believe that the worst is over and have begun if not already moved their allocations to 85% stocks in hopes that the bear market is over and we are in the first leg higher of a new bull market. It is precisely this type of psychology that makes me reluctant to believe that the ultimate lows in the equity indexes have been seen. It would be a different story if these sentiment readings did not get so bullish so quickly, but they have and we MUST adhere to what history has taught us over and over again. THE MASSES ARE WRONG AT MAJOR TURNING POINTS IN STOCK PRICES!

Blackstone - A Solid Short and A Solid Buy

The title sounds a bit confusing I know, but it really sums up the position the stock is currently in.

BX offers a solid candidate to sell short or buy puts and after the soon to come decline will offer a solid buy for a strong move higher.

Take a look at the chart below and see what I am referring to.

For those who want to trade put options on BX, you need to give yourself enough time for the stock to reach its downside target. This means going out to June at least as May options are in their final week of life and should be avoided unless a day trade is the point of order.

Currently the June 20 Puts are trading at 1.85/1.90 and offer the best buy based on risk reward.

Remember to always use a protective stop on all of your option trades. There may be times that you have to use a mental stop because the options could be open to manipulation by market makers and they are well know for looking for stops and moving the Bid/Ask down to those levels whether the stock moves or not. I realize that this is something that seems a bit on the shady side, but it is part of the options game and a part that you need to be aware of.

AN UPDATE FOR SHORT TERM TRADERS AND ALSO AN EXCELLENT LESSON IN THE MAKING

Now that I have my trusty notebook I can give a more detailed outlook on what the probabilities tells us about Tuesday.

It was much as I expected, except there is a bit more urgency involved.
If you have decided to carry your call options overnight then you need to release yourself of them no later than 9:45am est.

9:45 is also the time that we will want to purchase in the money SPY put options and I stress in the money. Not at the money or just out of the money, but IN THE MONEY. You are going to pay a little more for these options, but the reduction in risk will more than offset the increased price you will pay.

From 9:45am we should work our way lower finding some support in the 11:15 to 11:30 time frame. This should lead to a consolidation until 12:30 - 12:45 when we should break lower once again and not find the days low until 3:00pm. From there I would expect a small rally of sorts that could retrace close to 50% of whatever downside damage we have been subjected to up to this point. With this in mind, it would be appropriate for buyer of the PUT options to exit 3/4 of their position in the 3pm time frame and let the remaining 1/4 of the position stay in place with a break even stop loss. This will allow us to capitalize on a market that may in fact not even have the strength to put together a rally of any consequence.

Don't forget also that we have the Monday/Tuesday reversal pattern on our side for tomorrow so any strength that Tuesday brings can be sold or shorted with low risk.

Make sure you take a look at the chart below as it gives and excellent real time example of what may be going on in the intermediate term. This certainly does not guarantee that this is what will come to pass, but it is a very good time to watch and see if the pattern completes.

Equity Market Comment

The market action we saw today was pretty much in line with expectations and those who purchased call options were rightfully rewarded.

The markets ability to follow the patterns we have mentioned over the last few days lends some confidence to the outlook we have been seeing.

If we are to remain in this stage of price action, then Tuesday should bring early strength into the 1407-1408 SPX level followed quite quickly by weakness and a full blown continuation of the correction we have seen.

I do not have my seasonal notebook with me so for short term traders I cannot give specifics other than early strength followed by fairly strong weakness, so if you still have your call options try and take your profits in the first half hour of the day. I will give the more specific seasonal pattern once I have a look at my notebook.

Intermediate and Long Term traders are holding fast with a light 45% allocation to equities until the dust settles and we have a better idea about whether or not the worst is behind us or the next leg down (which could be a killer) is right around the corner.

The small investor continues their ways of bullish persuasion with the non stop call buying routine.

From an intermediate term perspective this is a very bearish precursor to lower prices and should be decline in value as I see over the next couple of weeks and not see the small investor shed themselves of these call buying ways, then the road could get very bumpy before it gets better.

Equity Market Comment

The market continued lower on Friday, but was able to attract buyers into sell programs that had the opportunity to send prices sharply lower. Friday was also the best day of last week to subject the market to sharply lower prices.

Monday begins a new week and also Monday brings into light the potentially strongest day of the week. With this in mind and also based upon the 1/2 hour chart, we can expect a very short term rally from here that should retrace about 50% of the decline we have had so far which should bring the S&P 500 just back above the 1400 level. However, from here we would expect the correction in prices to continue to the downside.

Long term traders should remain 45% invested in stocks with the potential to hedge positions further should the need arise.

Short term traders can look to play the counter trend rally with call options. Keep in mind that the counter trend rally should only cover 18 - 20 S&P points so purchase your call options accordingly.