"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
Sun Tzu

Thursday, February 28, 2013

The Rise in Volatility: Bullish or Bearish?

Volatility has been on the rise during the last two weeks. In order to find out if that's bullish or bearish, I looked at similar events during the last three years when the S&P 500 was trading above its 50 DMA while the Average True Range (ATR) was rising sharply. Note that this is rather a qualitative than a quantitative study, but it gives some idea of the historical market behavior.

Tuesday, February 26, 2013

The Short APOL Trade

APOL had been a perfect short setup last Friday: the stock had been underperforming for months.

Sunday, February 24, 2013

Learning from "One Bad Trade": KKR

"One Good Trade" is a great book about the topic. Mike Bellafiore's message is simple: focus on making one good trade at a time and the profits will take care of themselves. A good trade is not necessarily a trade where you make money. Even a losing trade can be a good one if you followed your rules. 

Thursday, February 21, 2013

US Stocks: Airpocket Ahead!

Technically, stocks are at risk to hit a major air pocket below and we could see stocks decline around three percent very quickly. Again, this is just based on technicals and there are three different ways to evaluate the situation: first major Fibonacci retracement (blue) is around 1480, which is roughly the last major breakout level (red). This will be another strong support level. Finally, the intermediate-term uptrend (green) does not get violated until 1480 as well. Until then, there is not much to hold up stocks:

Aipocket: no major support above 1480

When is it Time to Buy Gold Miners?

Various market participants have been making the case for buying Gold Miners for value reasons. Take for example Bond guru Jeff Gundlach, who recently made his case.

I prefer to monitor relative strength relative to Gold before making such a call. Consider that Gold stocks actually compete with the metal for investment money and you want to invest into the asset class which is running the show. Unfortunately, underperformance of mining stocks has been a long-term theme as can be seen from the chart below. During the last seven years, only in 2009 miners were able to rise faster than Gold. Reason for underperformance? Maybe increase in exploration costs, but honestly the reason is not important. Once miners start to outperform, I'll get interested.

Gold Minders have been acting weak for many years

Disclosure: Covestor Model is short GLD.

Tuesday, February 19, 2013

How far can Gold Fall (Short-term)?

Here is another view on my short Gold trade. The following chart shows the 5-day Rate-of-Change or the price of Gold. It highlights that the metal is capable to frequently decline 5-10% in a very short period. In fact, during the last 7 years, one or two of these selloffs occurred each year. Gold just lost 3% in the last week, so there is still some room before I plan to take profits. Should we get an aggressive reversal earlier, I would of course close the trade.

Disclosure: Covestor Model is short GLD.

Swing Trade Setup: Visa

Visa (and actually Mastercard as well) is in a great technical position for a swing trade on the long side this week. V has been in a stable uptrend for the last two years and recently consolidated gains in an orderly fashion. Last week, V successfully tested important support, creating a "Failure Test" setup on the daily chart. These tests often create short-term buying pressure and it can be rewarding to join the crowd until the stock records new highs. This is a very clean swing pattern and I plan to enter the trade later today.

 V: Daily Weekly Chart

V: Daily Chart

Sunday, February 17, 2013

Why I Shorted FCX

FCX is a new short position in the Covestor Model Portfolio. I have been eyeing the stock for a while. FCX setup a "Failure Test" pattern, where price fails at major resistance.

Beginning of December, FCX acquired MMR. Investor didn't like the new diversification strategy since Freeport had always been a Copper pure play. The story might still be a burden for the stock going forward. FCX has been underperforming the broader market since the beginning of the year and the Basic Materials sector has recently shown some weakness as well, possibly due to Dollar strength.

With a current price of $35, a stop at $36 and target at $32, the trade offers a nice 1:3 risk reward ration in an overbought equity market.

FCX: a nice entry inta short postion last week.

Basic Materials acting weak recently.

Friday, February 15, 2013

The Short Gold Trade - Some More Technicals

My short position in Gold is a short-term trade - nothing more. The chart below shows that the metal is in an intermediate-term range between $1,550 and 1,800. Shorter term, Gold is trending down. With my current position, I'm simply trading a swing within this downtrend. A lot has to happen for Gold to break below the 1,550 support and I don't see this happening.

 Gold showing a short-term downtrend in a longer term range

Gold has the tendency to go through long consolidation periods after vertical price moves. The following monthly chart shows that Gold's action during the last two years is nothing unusual and calling the end of the long-term trend is not justified in my opinion.

Long-term, Gold is consolidating gains

Disclosure: Covestor Model is short GLD

How I Trade: Three Examples, One Stock

It is always a good exercise to go through past price action and determine where one would have bought and sold. The following example of PGR shows three FICTIVE long trades that would have been justified in recent months with rationale. This exercise is to illustrate my trading style for (new) Covestor Model subscribers and fellow traders.

PGR offers characteristics of a good short-term trading stock: liquidity, well-structured (non-choppy) price action and a market-leading stock as can be seen by relative strength.

So why did I not trade PGR in my own account? There have been many other great opportunities in recent months and I simply cannot trade everything :-). Also, instead of showing three different trades in three different stocks, I wanted to highlight how a perfect example can look like and how one company can offer several opportunities over time.

Three fictive trades illustrate my trading style

Thursday, February 14, 2013

Back into Shorting Gold

Today I initiated a short position in GLD. I discussed my rationale here. Here are some more points:

Some pundits claim that Dollar strength is responsible for Gold's weakness.  I don't agree. The following chart shows that the US Dollar has been moving sideways during the last months, but Gold is clearly in a downtrend:

Gold trending down while US Dollar moves sideways

The other reason is sentiment: take a look at Finviz and you'll see a lot of bullish comments. 


Too many bulls for me. So here is my take why investors are obviously dumping the metal: everybody is talking about investment money moving from bonds to equities. What if it is actually moving from Gold to stocks as well?

Same Breadth Divergence Like in February 2012

Fewer stocks are participating in the rally: the "S&P 500 Percent of Stocks Above the 50 Day Moving Average" indicator is declining from a very high level. We saw the same pattern last year before the S&P 500 lost 2 percent, which is of course just a minor pullback and no concern to longer term investors. The swing trader, however, should be careful in initiating new long positions at this point:

Short-term breadth divergence could lead to minor pullback soon

Potential Swing Trade: Long CIT

Financials are on fire and CIT is in a very promising technical position: whenever a stock reaches key support/resistance levels, it is important to watch how it trades around these zones.Goal is to anticipate a potential breakout, which can lead to strong moves. Note that I'm not trading the breakout itself. I either enter before or after a pullback to avoid volatility.

CIT is in such a position with intermediate-term resistance around $43. The stock has been outperforming the broader market since last August:

Weekly chart of CIT: stock trading at key resistance

The daily chart shows how CIT already took out shorter term resistance at $41 after positive earnings end of January. The stock had to digest two downgrades in the last two weeks but price is still holding up well, so I'm anticipating that CIT can break above $44 in the short-term.

I'm looking to initiate a swing trade on the long side in the next days with a stop around $41.50.The beauty with this trade is its potential position size: theoretically, I could put 30% of my account into this trade to reach 1% portfolio risk. However, my actual size will be smaller to limit portfolio impact, possibly around 15 - 20% of account size, which is still a significant amount:

CIT daily chart: strong buyers are able to keep price up

Tuesday, February 12, 2013

POMO Pump: the Reason Why I'm Still Long

Surprised that equities have been rallying since the beginning of this year? I'm actually not. It is surprising, however, how strong the FED's "Permanent Open Market Operations" (POMO) have been correlated to equity performance in recent years.
Rob Hanna of Quantifiable Edges posts related charts in his newsletter (which I'm subscribed to) and they are eye-opening. The following chart is taken from the public section of his blog and gives you an idea of what I'm talking about:

Not surprisingly, we have seen extremely strong POMO activity during the last six weeks. The POMO pump is maybe the strongest reason, why I still trade from the long side. I tried an index short yesterday (TZA), but quickly closed this one with a small loss.