Saturday "Rock" Blog: Saturn in Time

Outer Space from Sander van den Berg on Vimeo.

For all those bear haters out there...

Blogger Gone Skiing

In a bout of perfectly lucky timing I will be on vacation next week. The markets look poised to stay in the recent range by drifting higher next week ahead of the February options expiration. Even with Thursday's big rally, the S&P 500 closed the week down a whopping 4.68%! On Tuesday morning we saw a sobering ISM report which led to most of the weeks declines following the bullish euphoria the week before over lower interest rates. Looking at the charts, the market seems to be doing pretty much the same thing it did last time the fed cut rates as scheduled:

As you can see above, the market has moved into what looks like a pretty reliable channel downwards. In particular, I'd like you to note what happened the last two times the federal reserve had a scheduled meeting where they cut interest rates. The market rallied up to the event (blue lines), popped on the news, then began the next leg lower. In fact, if you shorted stocks into the rate cuts you would up huge in the last few months. However, given last Thursday and Friday's action it appears as though we will drift higher back up to the upper end of the channel next week. The chart appears to be shaping up exactly like mid December (see orange circles) when there was a relief rally after the initial decline following the rate cut. Once that upper trend line got tested in December, the market sold off hard and made big declines to new lows. I have also noted in the chart our target below the recent lows of $126.

Thats a long winded way of saying I am expecting SPY to rally up to around 136 next week or about 12,500 on the dow, maybe a little higher. This will be a much safer area to re-enter or add to shorts before the next big decline. Personally, I am still short with some hedges because since I'm going skiiing next week I won't be able to play any upside moves. Furthermore, the downside opportunity greatly outweighs the possibility of getting in at better prices. Now for a few individual charts that have been on my mind lately.

Last Wednesday I began to get bearish on RIMM after the CSCO ceo said he had "confirmation of a continuing stream of data points we've gotten in the past two months that business is decelerating." This can't be a good sign for the RIMM which has made a name for itself supplying the savy businessman a smart phone. Ok sure, we knew that consumers are hurting and that side of RIMM's business would probably take a hit. That explains part of the recent decline in RIMM's share price. But now that business spending is slowing too, that could really do some damage to RIMM's bottom line. I'll be sure to do a bigger post on RIMM at some point. For now, just check out the chart:


I want to congratulate UpNorth for making a great call in chat on Friday for a strong close on RIMM, nice one! To me the chart has clearly topped and I thought that the break of it's 200 dma would lead to a sharp decline late last week. But RIMM found support in the $80 area (and at its 200 dma) and was able to run following the CSCO earnings report Thursday despite the obviously bad news. I think there is a decent chance that RIMM could rally back up to strong resistance around $100 where it will be fantastic short in my view. But once again, in my view the downside (my target is $60 in the chart above) greatly outweighs the upside or the potential to get short at better prices.

Another stock that came to mind last week was one that I got burned on last year by getting short way too early. SIRF dropped more than 50% last week after a weak quarter and a disappointing outlook:


Right after I discovered the stock's downtrend and started getting bearish on it, Wall Street firms began to pump it like crazy. There were upgrades and all sorts of bullish articles on yahoo that began appearing so I lost money and go out. By the way, SIRF makes GPS chips for hand held devices like car navigators and blackberrys (RIMM). Anyways, I learned a couple of things from this situation:

• Never underestimate the stupidity of wall street analysts
• Stocks can fall much further than most expect
  
• Be patient
• The device stocks are in trouble (RIMM, GRMN, AAPL, etc)
  

Ok, thats most likely the last post from me for a week but we'll see, I might be inclined to do a post if something big happens. I'll be in Jackson Hole, Wyoming surfing the snow and hoping to forget about the markets. Good luck out there!



Disclosure: I own CSCO and RIMM puts.

Don't forget to vote

Our second poll will be concluding tomorrow and I want to know what the typical Stock Geometry reader thinks right now. It certainly feels like a cross roads for the US economy, the markets and politics to me but I've been wrong before. I would really like to encourage every reader vote, regardless of how frequently you participate or how certain you might be. There were almost 1000 unique visitors here in the past month but only 15 votes so far. You have until 5 am EST Tuesday night to get your vote in, what say you!?

In the last poll we did here you called the top on a 5 year run in stocks and so far that looks like a pretty incredible call. Making new highs or making new lows will involve a big move from here and the outcome could validate or negate the last prediction (end to the bull market).

On another note, if you live in a super Tuesday state like me (IL), tomorrow is your day to vote in the primaries. If you are undecided I urge you to give some thought to Dr. Ron Paul, he has my vote.

Also check out Tim Knight's new video, I'm jealous of his positions.

One reason why I trade options...

If you are in the right option at the right time you can make pronographic profits. Near the close yesterday 1200 YHOO Feb $25 calls traded at .03 so if you had bought all 1200 of those it would have cost you $3600. After the buyout news today those calls were trading at $4 for a one day gain of 13,233%. The $3600 you invested yesterday would be worth $480,000, nasty!

Pullback Ends with a Hammer Reversal

Well that rally sure was nice. Not only did it provide some cool long side opportunities but it also gave us some sweet shorts. The pullback I was looking for on the indexes has completed perfectly. After a week long 1000 point rally on declining volume the dow staged a major reversal today on huge volume (note the inverted hammer). This sharp move up was characteristic of the types of rallies I expect us to see over the next few years. As you can see on the dow jones below, we rallied back up to the area where we first broke down which happens to be the 50% retrace of the overall decline from all time highs. Using a measured rule, I am expecting another 15.6% decline in the dow (matching the first leg) which will bring it down to roughly 10,500 in the next few months.


Now I've talked about the fallacy of thinking rate cuts are good for the markets, but today was something else. The market has seen the most rapid decline in interest rates ever with a 1.25% drop in a little more than a week. So if cutting rates was ever going to boost the stock market it would have happened today and the market did rally at first, a couple hundred points in fact. However, these gains did not last and the broad indexes all closed in the red at their lowest levels of the day, this is exactly what a hammer reversal looks like.

The media tells you big rate cuts are ultra bullish when in fact they signals major economic problems. Furthermore, the fed is essentially murdering the US dollar. You can expect to see gas prices much higher, food prices much higher and traveling much more expensive in the coming years. Is the tanking US dollar going to prevent a depression or signal one? I heard someone say today that the market acted like a spoiled brat demanding a new toy. It got the new toy, played with it for about an hour then threw it on the ground and started screaming again. Here's the S&P intraday action:


What I'm try to say here is that I am once again 100% bearish on the stock market. I have to admit that I was fooled briefly today and made the stupid decision of buying back some JASO and NYX calls after the cut. But I will be out of those tomorrow as I'm pretty much threw with calls for a while. Luckily, I had the foresight to load up big on DIA and BAC puts near the highs, so I did ok today. Time to be bears again, new lows are coming up in my humble opinion. I'll leave you tonight with a 3 year chart of the US dollar index, your hard earned tax dollars are working hard against themselves:



Disclosure: I own March DIA puts

Its been a good first year for JASO

Disclosure: I own JASO calls

Pullbacks

I'm really tired so this is going to be a short post on the recent pullback. I ran into a great article by Bulkowski on throwbacks and pullbacks over the weekend, take a look. Bulkowski defines a pullback as the climb in price back to the base (breakdown price) within 30 days after a descending triangle breakdown. In other words, after a stock breaks badly on large volume it often "pulls back" to the price where the break occurred. According to Bulkowski's statistics, pullbacks occur 56% of the time after an average initial decline of 9% in the three days following the break. Now take a look at the S&P 500:


Depending on where you draw the base of the descending triangle the pullback may or may not have completed last week. Notice how the S&P 500 pulled back to the August low at 1370 last week almost to the penny, then sold off again. The volume was lower on Friday as the market declined so I think there is still a good chance that the we rally back up the November lows before tanking again but we'll see. Bullkowski says there is a 56% chance that the pullback occurs so returning to 1400 on the S&P 500 should be slightly more likely than continuing to fall in the short term. I would really like to see a rally back up to that 1400 area where the 50 dma will be and declining volume would be ideal ( what we are seeing so far). However, I have little faith in this market and will take profits on the long side when I can.

Right now seems like a great time to be looking at individual stock charts for completed pullbacks for short entries. I don't have any specific charts for you tonight but maybe I'll throw some up this week. A few other noteworthy news bytes:

Bush will give his state of the union address Mon night
CFC reports earnings Tues before the bell, no conference call
FOMC decision on interest rates on Wed, market predicts .50% cut
GOOG, MA, ICE and AMZN earnings this week
Credit squeeze is a windfall for the exchanges

Disclosure: I own NYX and ICE calls, also BAC puts

NYX chart

Here is that chart I promised and to be honest it doesn't look very bullish. Certainly NYX was oversold and is due for a meaningful bounce, but there is quite a bit of resistance above. Resistance starts at $75.84 followed by the moving averages around $81 then theres a downtrend line at about $88. I will give NYX credit for having a huge intraday gain from the opening gap down. Sure the whole market came back from the lows but the dow closed down 128 points while NYX managed to finish with a gain. Volumes surged all around and this volatility must bode well for NYSE and AMEX volumes. I will try and exit my newly acquired NYX calls near the 50 dma.

On a side note, FXP is another creative ETF that trades on the AMEX, now owned by NYX. From yahoo, the FXP "seeks daily investment results, before fees and expense that correspond to twice (200%) the inverse of the daily performance of the FTSE/Xinhua China 25 index. The fund normally invests at least 80% of assets to investment that, in combination, have economic characteristics that are inverse to those if index." ProShares just went public with this ETF a few months ago but look at how much the volume as grown (good for NYX):

I also added what looks like an inverse head and shoulders pattern with a price objective near $125. I wouldn't put much weight in this pattern because this chart doesn't have much history to go on, and also this ETF was not trading during the Asian market crash over the last few days (because the US exchanges were closed). In fact, I took a call position in the FXI today which is the opposite bet to FXP, but after this international bounce is over I would be very interested in a long term short position in the Chinese markets. I went ahead and added the pattern because I saw it, even though I am currently trading against that pattern.

Disclosure: I own FXI and NYX calls.

Volume is in an uptrend!

Well it looks like the crash you expected is finally upon us. Most of you are probably aware of the carnage in worldwide markets over the past two days and the collapse in the US futures. To be honest I don't really have a whole lot to say about it, just look at some of the archived posts. For the past year we (the SG authors) have been talking about the seriousness of the issues facing the markets. Now that bear market is hitting the world in full force, well, who is really surprised? Ok, the fact that the crash of 2008 is upon us is a very serious matter, people have been financially destroyed by this event and there will be more blood on wall street before this is all said and done. For traders who will be taking advantage of the insanely high volatility tomorrow, please take these "circuit breaker" price declines into consideration.

Instead of getting all doom and gloom I thought that tonight I would write about a more positive scenario facing the exchanges, specifically the NYSE Euronext. The argument is simple, the exchanges charge small fees for every transaction that occurs. When volumes grow so do their earnings. After looking at a number of charts I have concluded that volumes swelled in the last bear market. This makes sense somewhat because volatility increases and that goes hand in hand with higher volume. Take a look at this ten year chart of the dow jones industrial average and note the volume 2000-2002:

You see pretty much the same trend on the new york stock exchange:


Volume seems to steadily increase until the end of a bear market when it spikes which is consistent with typical technical analysis. Furthermore, this seems to add to a longer term trend in volumes increasing over time. So it appears the exchanges have long term organic growth with some acceleration during bear markets. While the examples I gave are for stocks I think its safe to say you see the same thing in commodities and futures markets. In fact, the most recent headline on ICE is that they hit an all time high in futures volumes last Friday. With all the craziness in going on right now you can bet that they will be breaking that record for a fourth day in a row tomorrow.

Some have argued that with the credit freeze up the merger and acquisition activity is done for a while, but last week the New York Stock Exchange bought out the American Stock Exchange in what looks like a sweet deal for NYX. It seems like a takeover of ICE or NMX by CME or NYX is still on the table to support valuations. As far as the nyse/amex deal, the reason why seems so good for NYX is they are getting commisions on the biggest and most heavily traded etf's in the market. Take a look at these volume trends of amex ETFs over the past year (top). Notice a trend?

All of those etfs shown and options on them are now traded on the NYX owned exchanges. NYX is benefiting from both the etf boom, including the rise of inverse market etf's like QID from proshares and the increasing volume due to volatility. Now I'm no specialist on the sector but it seems pretty straightforward that the exchanges, especially NYX, are going to see a huge windfall from all this market activity. They seem to have timed their amex acquisition perfectly.

Now I know the sound of "stock exchange stocks could do well in a bear market" sounds somewhat suspicious but it makes sense to me. It would be a relatively simple thing to check if it weren't for the fact that every exchange traded exchange has come public in the last five years. Neither NYX, nor NDAQ, nor CME, nor ICE were publicly traded during the last bear market so we can't just go check their charts and see what happened. In fact the concept of a "for profit" exchange is relatively new in general, so maybe its the case that they will suffer materially in some unexpected (or expected?) way from a bear market. Let me know if you have any thoughts on this. If the markets go flat for a long time that will certainly be very bad for the exchange business, and thats a real possibility in my opinion. But for now volume is in an uptrend!

Disclosure: I have no position in NYX but I own some ICE calls.



Good luck out there tomorrow and be safe. I'll post an NYX chart tomorrow sometime, it doesn't make sense to do one until we see what happens in the morning. Stay tuned...

Saturday Rock Blogging: My Life

Great song and a campy video huh? I love it.

Here's a higher quality version or you can check it out live.

If you liked that you'll love this and you'll go nuts for this.

Volatility spikes as panic ensues...

The only indicator not pointing to a bounce in stocks has been the volatility index VIX. At the market lows in August and November the VIX spiked to 37.50 and 31.09 as seen below indicating a panic. Today the VIX climbed over 4 to hit a high of 28.51, breaking the trend line made by the two most recent VIX highs. Volatility usually spikes at turning points and it appears we are close to one in the markets with this kind of action. The VIX could spike further up into the 30's sure, but after today's 17% gain its probably time for a relief rally. I am now in some beaten down growth stocks (WFR, SIGM, JASO and ICE) and cash, it seems to risky to stay short here.


On a side note, I have very very perplexed by the VIX basically going flat since the start of 2008 while the market basically crashed (nasdaq is down more than 10%). This is quite unusual and seems to indicate a general complacency about the decline but there are other theories. It might be possible that as we enter a new regime for the market (bear mode) the usual indicators may fail to work like they used to. Specifically, in a bear market volatility may tend to decline with prices as they "trend." Whereas volatility might spike on sharp short covering rallies, it makes sense to me but this goes against the usual "volatility spikes at market bottoms" idea. I have also wondered how the put to call ratio has been able to steadily climb lately while volatility remained dormant. This is generally a rare event for markets and has been suggested to be a very bearish scenario.

Gold continues to make new all time highs...

Inflation, what inflation? Shame on the federal reserve.

Saturday Rock Blogging: Coldplay

Its just one of those mornings.

SOLF charts

Just thought I'd add my two cents on SOLF after xerxes' post tonight. First off, I don't know much about the fundamentals other than that it appears much cheaper than the solar leaders like SPWR and FSLR. Also, I have heard that there may be some issues with the company by people that have done research on it, but can't say much more than that. If you want to do some digging, I'd start with their website.


The daily chart looks pretty good, I've drawn a few trend lines on the chart above (click to enlarge). I would like to see that 50 dma catch up, but there has been a nice pullback from the highs and the RSI came in from overbought levels. One reason for concern would be that the CCI recently gave a sell signal by crossing over zero and this indicator signaled a pretty good buy back in Nov. If it can hold $25 I could see it making new highs.

On the options, they are expensive (see implied volatility above) but they have been more expensive in the past (early dec). They price in an annualized 120% move in the stock which compares to the QQQQ options which price in a 30% move. My software actually sold some puts naked earlier this week because SOLF has some of the most expensive options in the market. As far as a straddle, I like that idea because it seems unlikely to me that SOLF will stand still. It should either pop or drop, the problem is the options price that in.

As you know I am already bearish on FSLR and if it drops as big as I'm expecting SOLF won't look as cheap. Being late to the solar rally, I think SOLF carries a good deal of risk if the solar leaders like FSLR and SPWR tank. For now though, it seems like here is a low risk place to get long SOLF with a stop around $25.

The 100th Post

It is my pleasure to bring you the centesimal post on Stock Geometry! Since the first post here on May 24th 2006, the other contributors and I have been calling em like we see em with a high success rate (AHM, CCRT, DDS, COF, JASO, OMR, DECK, CREE, LEND, etc). We haven't been right on them all but its the mistakes that we learn the most from. While this site was originally started with purely chart interpretation in mind, it has developed into more of a hybrid of fundamental and technical analysis which I believe to be the most profitable method. In honor of the occasion, I wanted to fill you in on some of the technicals and fundamentals of the site its self, here's some data on the last 6 months:


As you can see, the readership is still quite small but has been increasing even during the typically slow summer months. Currently, the biggest days for the site are when there is a link posted on yahoo finance or other blogs. Thats when we get the most attention, so thanks for spreading the word. Theres a bunch of interesting info in the pictures above and below for the web 2.0 nerd types like me, just click on the pictures to zoom in (as usual). Below you can see the geographic distribution of the readership:


I've got it broken down by city and country there. A few notable cities are Urbana, IL (where I live), Santa Barbara (where I use to live and betweenthebars lives now) and Aachen, Germany (where indigo-alien lives). We also seem to have some frequent readers in New York City, Louisville, Pleasanton and Vancouver. Those of you who we have not met, please introduce yourselves!

I think the three of us contributors agree that we get just as much out of the process of writing on this blog as we do reading each other's work. The idea here is to share thoughts on the market in hopes that we can learn from each other. There is no ulterior profit motive here, note the lack of advertisements, and I hope it stays that way. Fortunately, google provides this great blogspot service for free along with the service I used to generate the above data called google analytics. So a big thanks to google. I also wanted to take a moment to thank the other contributors, Ian (indigo) and Vince (btb) for making this such a fun and educational project to be apart of.

Going forward we don't have any big plans at the moment. I am pretty happy with the ways things have evolved with one small complaint, it would be great to see more feedback in the comments. Even if it is just a short note about a chart, some news that was overlooked or even a missspelled word, it is greatly appreciated. I'd really like for this to be more of a two way process between the bloggers and the readers. Thanks to all of those that have commented and I'm sure the number of comments will grow with the traffic.

If you are interested in keeping up on non-market related activities that we have going on , Indigo and I both have other blogs which you can find the links to on the right hand side of the page.

Ok well, congrats Stock Geometry on 100 posts! Now for the next 100! Thoughts?

I'm not bearish on all stocks...

The two sectors that make the most sense to me fundamentally are international growth areas like China and energy related issues (which are international typically). Combine these two sectors together and what do you get? JA Solar (ticker: JASO), a Chinese solar cell company that did an IPO about 7 months ago. This is a stock that I highlighted back at the beginning of the summer when it was 24, that was before it doubled and has now pulled back. Well I still like it, and it is still in a strong uptrend. Furthermore, earnings were great and an analyst upgraded the stock last week following the numbers.

Disclosure: I own JASO calls

Solar Squeeze (FSLR, JASO, LDK, SPWR, TSL)

The solar stocks have been on a rampage lately on increasing volume and many of them have massive short positions. The poster child of this rally is First Solar, ticker FSLR (see above), which recently had a big gap up and run on $1.3B in new solar panel orders. FSLR has formed what looks like a short stroke (no pun) on the daily time frame. This is a pattern you see after a big move where a stock consolidates mostly sideways for a week or so before blasting higher again. According to IBD, this pattern provides an "itty bitty opportunity to buy shares."

Since going public last fall the short interest in this stock has steadily risen. Theres no doubt that this will be a great short at some point, but lets wait for signs of a top first and until then the premature shorts will propel this stock higher as they take losses. I am very bullish on this stock above $119.85 (the all time high) which is conveniently just below $120 so this may provide a pause for the inclined to buy $120 calls before they go in the money. This level would then be a nice price to set a stop or for a longer term hold or a trailing 8% stop might be effective given the 8% range in the short stroke.

I'll leave it up to the readers to check out the charts of the other solar stocks like JASO, TSL, LDK and SPWR, but they all look very similar. They are exploding higher as the short interest grows. One stock that for the most part has not joined along that is in this sector is WFR. I have been bearish on WFR for a couple of months now but the chart is starting look good again after a few months of consolidation and base building. If WFR can manage to close above $67.50 things could get interesting. Based on a rough measured rule $85 seem like a good target once WFR starts making new all time highs.


On a few other notes, ICE broke out and looks like an awesome buy at pretty much any price as it marches towards my $210 target. In fact Investors Business Daily recommended ICE as a buy in the weekend edition of the paper. SWKS has earnings after the close on Wednesday and I will probably take some profits (but not all) ahead of that announcement even though I am still very bullish on the stock. AHM might be finding some support at $14 but who knows, that stock is a train wreck. I am also interested in IMB as another mortgage company short (like AHM and PHM). IMB seems to have more downside potential than the other mortgage stocks and the chart is begging to be shorted. Finally, Brian over at Alpha Trends had some interesting short squeeze ideas over the weekend. Check them out.

And don't forget that July options expire on Friday, so deal with your July's if you haven't yet!

Disclosure: I own ICE calls, SWKS calls, AHM puts and IMB puts.

Summer Trades

I'll be leaving for a two week vacation tomorrow so I've been looking for easy trades that require little attention. Today I want to let you in one of my favorite longs and my favorite short that fall in this category.


I've been following JASO since shortly after its IPO in February. The company makes solar panels on industrial scales in China, so you could say its a Chinese solar play. Following its IPO the stock formed a healthy two month base before breaking out in April on a surge in volume and price (20$ - 28$). Since that move the stock has been working on a second base and found good support at its 50 day moving average. I like this chart right where it is but if you want to play it safe look for a break of the line connecting recent highs on above average volume. If you look at the April breakout you can see a similar pattern and indicators to the recent chart, and so I have been buying the stock near $24.

A stock I love to hate is CREE and when I see it going nuts like it has lately I can think of little else than the ride back down. I have posted about the blessings of being short CREE in the past so I won't go into details about why CREE is fundamentally such a great short. I will however suggest that the stock's little squeeze is nearing an end with the daily RSI at 85 and the price trading far above its upper BB, the stochastics said it was overbought days ago. I think its a no brainer short up here, there is no news to justify this move, not even remotely, eps growth is still negative.


I'll be back to posting weekly when I get back, in the meantime check back for posts by betweenthebars (btb) and indigo-alien. But don't stay inside and trade all day, enjoy the summer while it lasts! -pyth

Disclosure: I own JASO stock, CREE July 25 puts and CREE Sept 22.50 puts.