Monday, May 31, 2010

If there were only one book to read

“Boys, the stock market must be studied, not casually either, but deeply, thoroughly. It's my conclusion that most people pay more care and attention to the purchase of an appliance for their house. or when buying a car, than they do to the purchase of stocks. The stock market, with its allure of easy money and fast action, induces people into foolishness and the careless handling of their hard— earned money, like no other entity
“See, the purchase of a stock is simple, easily done by placing your purchase order with a broker, and later a phone call to sell completes the trade. If you profit from this transaction it appears to be easy money with seemingly no work. You didn't have to get to work by nine and labor for eight hours a day. It was simply a paper transaction. requiring no labor. It appears to be an easy way to get rich. Simply buy the stock at ten dollars and sell it later for more than ten dollars. The more you trade. the more you make, that's how it appears. That's ignorance, and ignorance is dangerous.
“There's also fear to deal with, which you will find out when you grow up. Fear and violence lie buried just beneath the stir- face of all normal human life. Fear, like violence, can appear in a single heartbeat, a fast breath and the blink of an eye, the grab of a hand. the noise of a gun. when it appears, natural survival tactics come alive, normal reasoning is distorted. Reasonable people act unreasonably when they are afraid. And people become afraid when they start to lose money, their judgment becomes impaired."

“The unsuccessful investor is best friends with hope, and hope skips along life's path hand in hand with greed when it comes to the stock market. Once a stock trade is entered, hope springs to life. It is human nature to be positive, to hope for the best. Hope is an important survival technique. But hope, like its stock market cousins ignorance, greed, and fear, distorts reason. See, boys, the stock market only deals in facts, in reality, in reason, and the stock market is never wrong. Traders are wrong. Like the spinning of a roulette wheel, the little black ball tells the final outcome, not greed. fear, or hope. The result is objective and final, with no appeal."
Jesse Livermore: World's Greatest Stock Trader
By Richard Smitten

Saturday, May 29, 2010

Memorial Day Weekend at DDT’s

After a good trading week like we just experienced, it's almost bittersweet to do a comment cleaner, but this is a long weekend and I'm sure we'll all file in here at one point or another before the bell on Tuesday- so time to freshen up our cave a little, and share some ideas. It's been awhile since we've shared individual trades, so if you have something up your greedy little sleeves, please do share with the class, as we're always open to opportunities out there beyond the chronic SPX-speak.

I have only briefly scanned the charts in the aftermath, and have a few of interest going into next week. We just finished up week five of this correction, which is one week longer than any other pullback we've seen since the March lows. Is this a change of trend? I suppose we each have our own qualifiers for that, but no doubt about it, this is not your father's Buick, nor does it have the same feel as the February pullback did, imo. Personally, I want to see a death cross and watch those EMAs or SMAs all line up in bearish order before I put up my feet for the summer, sip mint juleps and work on my tan - but that's just me. You might say, "but K, you keep showing us chart after chart that is signaling a trend change is here," but truth be told, all we really have right now is fringe evidence, not the full Monty type of clues that will allow us to let go of our paranoia mode- and that goes for all of us whether we tend to like to trade long, short or both. Our job is to just continue to monitor all of the moving pieces, and this is sometimes where impatience can do harm. I know I'm a broken record, but this is where our group shines, in my opinion, as we all have things we watch individually and bring them to the table as a well-coordinated team. All hands on deck, traders. We need everybody's contributions right now, more than ever. I don't pretend to know everything there is about trading, (I hope I never do or there won't be anything left to learn and that's half the fun,) and I know none of you do either, so let's continue to teach each other, mentor each other and most of all watch each others backs. This is the reward of trading that goes well beyond ROI if you allow it to be.

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hg_daily_6_1 sox_weekly_6_1 iyt_weekly_61






Lastly, take a minute.. just sixty seconds this weekend, to remember someone who is not with us anymore. This holiday is about remembering the soldiers we’ve lost in the U.S., but we have traders here from all over the world, and perhaps for you, it's someone in your life who was just a hero,  or someone you looked up to and inspired you to be more than you thought you could be. Be grateful for them, as most of us have made that promise we'd never forget them- well here's your chance to live that promise.  Enjoy this long weekend and see you all Monday night.



For our precious ones…



P.S.- for cycle watchers-  your weekend homework assignment… research Puetz Crash Window.  See if you can connect the dots up ahead for something we might all keep an eye on.  ;-)

Thursday, May 27, 2010

How to find the best option for your price and time strategy? (Guest post by chaugner)

Tonight's post is a complement of

chaugner  (looking good, huh???)

and too keep an eye on future misdeeds visit blog







Before I start, let me ask two simple questions.

“How often have you bought a put contract just to see it loose 50% of its value even though you are still at the same price you bought it a week earlier?”

“How often have you bought a call at what you thought was the bottom just to see it down in your account while the market has rallied the next day?”


We have all been there trust me. When I first started with options it was not pretty, I had some lucky ones but when time, price and volatility are against you – boy can you end up with a bad trade. I clearly remember that one trade that forced me to read up on options because I obviously was missing something. I did a straddle (buying put and call on same expiration and same strike price) on AA just before earnings thinking of a big move, nothing happened overnight and price stayed exactly the same at the open – thinking to myself “oh well, no money on this trade” it turned 9:30 and all of the sudden both positions were down 50%. I am sure many had similar experiences so it is extremely important to understand what option traders call the “greeks”. The Greeks are often overlooked by many traders that tend to just buy straight “naked” puts or calls. As part of this post we will be focusing on trying to get a better understanding on those Greeks and also do an exercise to find the best option for a specific market outlook you have. As I am covering many different areas you will need some basic knowledge of options first.

  • What is a naked option, put or call?
  • What is a spread?
  • In the money option
  • At the Money option
  • Out of the money option
  • Bearish Put Spread
So before you continue, read up on those above points above in case you do not know what they mean. To make it easier the focus of this post will be on bearish put spreads (debit put spread). There are many other option strategies out there for different market outlooks so let’s keep it simple in this first exercise for us here. When it comes to options, especially longer term ones (lets say 2-3 months out) I use two mechanisms to try to find the best option package for me:
  • TradeStation OptionStation Search
  • ThinkOrSwim Trade Analysis
Please sign up for demo accounts for both of those platforms if you do not have access. So for now let’s use the exercise of trying to find the best put spread for SPX at 880 in August with an increase of volatility of 30%. The beginner’s way for this is generally finding an option with the expiration close to the date you are looking for. In this case a beginner would usually buy a “SPY August 88 PUT” (out of the money) or a “SPY August 107 Put” (at the money assuming that SPY is trading at 107). So let’s go to trade station first and use their wizard based option search. Entry window for Tradestation OptionStation Search. I am using SPY here with 10 expiration dates out and 10 strike prices from current price. Current Price is SPX close @ 1074.03. Tradestation offers you many options either by selecting the strategy directly or doing it based on market outlooks. We are selecting debit put spread. We are assuming we want to close this position out in Aug 17th (because we believe we will have reached SPX 880 by that day). I just picked this date randomly, make your plan and put in whatever date you want here. We are assuming SPY to be 15% below current price (you have other options but lets keep it simple). We are risking $5K on this trade. We are assuming VIX is 30% higher compared to today. There are two other screens after this, just select next until you get to your final window. Lets take the top position that tradestation came up with here. It’s telling us the following:
  • Buy 63 SPY Aug 101 Puts @ 4.14
  • Sell 63 SPY Aug 98 Puts @ 3.35
(Keep in mind we are buying a total of 126 option contracts here). So now that we have the position, let’s switch to ThinkOrSwim where the real fun starts. Most people here use TOS so I assume you know how to put in your positions for analysis. After you put in your positions on the analyze tab (or go to add simulated trades) you should see a standard graph. Before we continue go to the top right section (red rectangle) and change it to the values that I put there. “+4 @ Day Step” and put something higher then 15 on the step. This will give us more visibility of where the position will be on different time scales. I also have a green rectangle around the Greeks (Delta, Gamma, Theta, Vega) – again we talk about this later. Your TOS should looks like this now: Now that your position is in the platform and you have your time slices properly mapped, you can drag the red-dotted line to different price points. So as an exercise lets take a look at our position when SPY is 108, double click on the graph around the 108 SPY price point. At this price point you can see your PL in the price slice window for today, but you can also see how much you would be down if we were to reach this price on different time scales (white rectangle left bottom). Next exercise is moving the red dotted line to 88 on SPY. Again the price slice window shows your PL and the bottom left side would show you how much you would be up if SPY 88 will be reached in different time windows. Final exercise, uncheck your spy short put position (left bottom) and change the quantity on the Long Put to 12 because that is how many naked puts you could buy with a $5K at risk (remember we only want to risk $5k on this trade so we assume that those 12 puts will go to zero). Now the graph here is drastically different, and heavily weighted against you. Take the example of SPY 100. If you had a spread you would be in the money on this position at any time until expiration, however, on the straight put you can see that if time works against you – not so nice. You may have heard this before in relation to options “you are racing against the clock”. This is a perfect example to show how time will affect your “naked” option. Ok, what next? Well first, play around with the following and see how the graph changes. After each change go back to your red-dotted line and move them to price slices where the trade went against you, slightly for you, and when you have reached your price target.
  • Quantities (add more long puts, add more short puts)
  • Option Cost (change price on your long put to something smaller, meaning you were able to buy them lets say at $3.00 each instead of $4.14)
  • Change Strike Prices – maybe a 105 put on the long side
  • Expiration Dates – change expiration dates to move them closer, or further out
  • Change the time step (at the top where it currently says 21)
  • Remove the short put and just use the long put with quantity of 12 and move left and right on the price via the red dotted line
Every option change you make, make sure to change the quantities to match the risk profile we are using. In this case $5000. For example changing the strike price will increase/decrease the cost of the option so you have to adjust the quantity accordingly. Cool stuff right? Now before you continue, go read up on the greeks, Delta, Gamma, Theta, Vega, just some casual 10 minute reading via google (focus on the delta and theta for now). After this go back to TOS and see how the greeks change based on the above changes I had asked you to do. Now go back and read that same information on the greeks again (oh yeah I am not making fun here). This is just an intro and if you guys and girls like it, I can go into a lot more details to be able to figure out how to get positioned, scale in and out and how to change your portfolio outlook on a dime by adding positions to your current holdings. As I am going into a lot of detail here it may also be helpful to do a “beginners guide” here first in case some of this is a bit over your head (don’t be afraid to ask, its your money, trust me, the more you know when it comes to options the better). The beauty with options is the usage of greeks. You have to make them work for you, not against you. If you can make the greeks work for you, you can create amazing option strategies that allow you to manage any type of outlook you may have. We may be bearish long term, but what if something where to happen on the short term that may change your outlook to short term bullish? Yes you can close out positions but sometimes you can add to your existing positions to change your portfolio behavior. Heard of delta-neutral, delta-negative or delta-positive before? Yeap its those same greeks and we can make some amazing short term changes to those core holdings to squeeze every last penny out of this market without exposing your hard earned cash to more risk. One final exercise to take just to show you one more way of how greeks affect your positions. Create 2 new positions:
  • 10 x SPY JUNE 107 PUTS @ 2.00 (something you may have purchased a few days ago)
  • 10 x SPY JUNE 107 CALL @ 2.50 (something you may have purchased today)
Lets take a look at that graph. The only thing missing from this TOS platform here is an option to give your money directly to the Market makers and forget about trading. That is what this graph is telling you. Until next time and be careful out there !!!



[Posted by DavidDT on behalf of chaugner ]

Wednesday, May 26, 2010

Here comes the Bear...

[This is a prop when well deserved to Brandt from who was spot on lately with his proprietary 3c indicator
Credits where credit is due – hat off buddy! DavidDT]

Here comes the Bear...
Again 3C had some excellent insight into the market. Last night at Wolf on Wall Street I posted the following,

"I would continue to hold the longs. I WOULD NOT ADD to them. Remember, this is a correction, not a bull market move. Smart money is selling into it and soon you too should be selling in pieces, taking some profits off the table. Do not get greedy and hold too long. We should see the reversal in 3C, but I do not know if they did the same as we did and set up a larger core short position, if they did, then the change in the uptrend could come very quickly."
And it did! Today at 2:07 we closed all longs at an additional profit. I also posted 9 and went short 6 stocks. There will be more posted as they arise, but the 6 form a core position that gives us a wide array of bearish market exposure. 
3C also had a great call this am at 10:50-see the post below-we got a nice correction from there. Then another post below around 2:08, a tiny bit earlier at Wolf on Wall Street, that we were taking profits and established shorts from there.
The charts below, which were posted at Wolf on Wall Street depict very clearly the reason for both 3C calls today, the a.m. and p.m. call.

It looks like we are now dealing with a Broadening top, the next break below important support should not be a shakeout as the last ones were, I think it will be the real deal and it won't be pretty, nor will it be a correction. Our downside target is significant and these bear moves are fast and far reaching. 
If you want the analysis, ideas, and insight into how the market really works, not from a book, but from real evidence for you to see for yourself, check out becoming a member of Wolf on Wall Street. Get insight like the post above from last night at WOWS when it really mattered and could be of use to you. 
One of the greatest values on Wolf on Wall Street is understanding what is happening with the market and what it is most likely to do and what you can do in a multitude of possibilities. As I alluded to many times, Technical Analysis is no longer what it used to be, you need to understand how the market really works.
For instance, how much time do you spend analyzing the market as compared to analyzing stocks? Do you know that the greatest gravitational pull on any stock you choose will be the market's direction and trend? And in second place is the Industry Group. the actual stock has the least to do with a successful trade, yet most people spend most of their time analyzing stocks. This is the kind of insight you will gain at Wolf on Wall Street. Interested? Click this link to get started.


[disclaimer: Trading to Win has long standing relationship with Trade Guild]

Tuesday, May 25, 2010

Deja Vu?



Monday, May 24, 2010

Weekly Sector Update | 05/21/10


An unusual week where all 24 sectors were negative. In the larger list of 147 sectors, there were no positive sectors. An unusual and brutal week if you were long. If you were short, then it was manna from heaven.

Friday, May 21, 2010

"Rigged Casino"? Don't like the kitchen?

ZeroHedge: "Even Cramer Is Now Outraged By The Rigged Casino Formerly Known As The US Equities Market"

I can tell you this – when someone quoting Cramer's opinion in order to magnify personal disgust for the parody suckers call Free Capital Markets – you know that someone is running out of topics…well, why would I care – lets talk markets.


Truly don't understand why "last 15 minutes" were "manipulations" – very healthy accelerated buying on the upside as seeing on "DaVinci" indicator for ThinkOrSwim (Freely available for download at Members Site)



For the sakes of "perfection" (I am a sentimental cruel origami folding perfectionist) of D-Wave daily with multiple touches of guiding trendline of the waves 1,3,5  and extreme closeness at the end of the waves – this newly confirmed wave A (as of yesterday's May20th close) better hold.

We have got our expected bounce (OK, I am not going to say "expected" because it sounds so full of self promotion, I might use the term "hoped" although I do not like to use "hope" not just for the market related conversations, but for anything in life – hope gets you nowhere while people who are selling you HOPE are enjoying their lives at your expense.



Possible wave B on daily needs minimum 8 bars (close below all prior 7 bars) in order to qualify so expect stale to upside action during next 2 weeks.


In Market update AMC 5/19/10 post I wrote: "wave A on daily may be continue down as low as  1056.74" and surely enough Ms. Market went all the way with today's $SPX open of 1055.90 which was immediately rejected (and I went heavily long SPY in addition to my small "probing" position as of yesterday – need to get back in the game and SPY with it's liquidity and "no leverage" suits my current state of mind quite)


As I can see most of traders here had blast of a week – congratulations, really great team here – see you all next week.

Thursday, May 20, 2010

The Chart of the Year

Well, kids, that was fun! For many of us who have been placing as much emphasis on time as price, today was a jaw dropper in some ways, and further proof that there is more than one way to skin a cat or trade a chart. We have some of what I think are the finest chartists in the blog-o-sphere here every day, and from day one, DDT has allowed us to keep an open mind and share every possible analysis method available to keep each other in the trade and out of trouble. Thanks for that, DDT. And moreover, thanks to every one of you for your tireless work and energy since we all starting meandering into this little trading cave known as TTW. You are generous with your teaching and time, and a thank you cannot really suffice. There are too many of you at this point to name, unlike those first months back in October, but you know who you are.

As mentioned earlier, please zoom out to longer term charts when you have time and make sure you see the story they tell, as well as your hourlies and dailies of course. Hopefully, we can do a little more trend trading and a lot less chop for awhile, but obviously, that depends on your own risk tolerance and patience. Also keep in mind that institutional buyers do watch the 200 SMA as a bell-weather. We are at 10% down now on this tape.. another 10% and we’re back in an official bear market, and I’m sure TPTB will move heaven and hell to ward that off, so we’ll be as careful on the downside as we have been on the upside. Yes.. we remain paranoid. Be careful on the knife catching too- there were calls for lower lows at 666 that never came to pass, and for all we know we really have seen the top for quite awhile.

With that in mind, I’m just sharing the weekly and monthly chart on IWM tonight, and hopefully DDT will pop in later with his DeMark take on the situation. But.. I’d also like to post up Zig’s version of a T Chart. This was a labor of love for him, and a big pay-off for many of the rest of us, not to mention his smaller time frame Ts. Thanks so much, Zig Zag. I think you have your own cult following now. :-)

Best to you all going into OPEX tomorrow- get some rest if you can – even success can be a stressor, so take good care of your health in the midst of everything else. Oh, and by the way- to you newbies to TTW, we are so glad to have you trading with us and hope you’ll stick around to enjoy what many of us have enjoyed for a long time now.

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zz t 5 20

Wednesday, May 19, 2010

Market update AMC 5/19/10

Wrote at Members Site on Sunday:
quick SPY update - first touch of SPY 111.26 on intraday basis will put wave A daily on the map. That might produce very strong intraday/few days bounce (similar to one on February 1st – exactly when wave 4 was "printed" intraday and then gone by higher close)…
Posted by DavidDT at 5/16/2010 08:07:00 PM
(BTW – Members Site's benefits now include free real time alerts for Trade Guild's proprietary indicator "3C" – all for just $15 per month.  Shall anyone be interested in more detailed and frequent updates with individual stock ideas Trade Guild has $50 per month subscription – for details go here )

Today SPY's 111.26 and corresponding $SPX's 1110.88 were hit intraday and surely bounce emerged…but definitely not the kind of the bounce I was expecting.  Closing prices are above aforementioned marls for wave A on daily to be put on the map, granted that this is an OpEx week I see no better scenario as move slightly down tomorrow, close below needed levels and burst up on Friday.

Ideal close for $SPX tomorrow would be below candle market with blue arrow and above TDST at around 1105.60


I wish I could say that 10 minutes D-wave (which was quite accurate lately – even counting "flash crash…on closing basis) supports my theory of "below 1110.88 and above 1105.60", but it clearly points to 1070sh as wave 5 destination.


This is NOT an easy market to trade right now – try not to initiate new big positions in any direction until "below 1110.88 and above 1105.60" is resolved.  From my POV there is nothing wrong with 1070 on 10m wave – wave A on daily may be continue down as low as  1056.74 (after today's muted bounce at key level for A I am less inclined to play bounce, but rather to wait for reasonable short entry.  But again – I am trading very lightly due to multitude of events that happened during last few weeks)

Tuesday, May 18, 2010

Into the Mystic

"It is not the ship so much as the skillful sailing that assures the prosperous voyage." -
George William Curtis

Just a comment cleaner so we can start fresh tomorrow when the bell rings. There’s not much to say that we all haven’t studied and mulled over already. What a great crew you all are! You are humble, you are focused and above all else, you are determined. Well done, very well done indeed. While the futures have filled the gap tonight, it remains to be seen what happens once Europe opens, and for all we know it will be a Whipsaw Wednesday due to OPEX, so once again.. back on our toes with eyes wide open and ready for anything they dish at us. On the chart below you’ll see both the 200 SMA and 200 EMA waiting right below us here and they could serve to be a formidable opponent. As I mentioned a few days ago, and I’m sure you all thought I’d lost my last marble - this is an important cycle week, particularly on Thursday, as well as the hoodoo that the skies have been dishing up now for several weeks running. I have to laugh at myself about this because I am a cynic about these things, but I’d rather laugh all the way to the bank and keep an open mind than be on the other side of this equation. Anyway.. good trading tonight and tomorrow to us all.

spy_ema_sma P.S. I promised you all back in January that this would be our year. Keep the faith. ;-)

(There is no “Van” version on the net, but this version isn’t too shabby either)

This is for somebody who has helped me navigate this tape behind the scenes day after day, and I will never be able to thank enough.

Monday, May 17, 2010

Boring Post

Hoping for some downside/consolidation to persist into Thursday and if so, will be going long Crude Oil, short dollar and may be long some EURO.


Crude I might buy tomorrow or IF new lower low will be set ( for this week)


Probably will start from UCO with stop below 8.80sh…jut for bounce for now.



Dollar…looks kind of toppy here, will keep an eye for the next few days



Still – I will REALLY have to see SPY hitting 111.26, but judging by today's action it might NOT happen and my A-B-C on daily is most likely not going to take place…no easy trade…

Sunday, May 16, 2010

Euro Gold €1000

Euro Gold €1000

Adam Hamilton     May 14, 2010     2635 Words

With the European sovereign-debt troubles dominating financial news, the euro has taken quite a beating lately.  The majority consensus opinion even believes that the euro’s very existence is threatened by this crisis.  This pervasive euro-bearish psychology has ignited euro gold, which is now challenging the fabled €1000 level.

These all-time-record euro-gold highs are very exciting, sparking global interest in investing in gold.  Just like we Americans view gold through our own US dollar lens, investors around the world think of it in terms of their own local currencies.  And for the 325m Europeans as well as the 175m more people living in other countries with currencies pegged to the euro, euro gold’s progress defines this secular gold bull.

And for American investors, euro gold is very important too.  Why?  Think of euro gold as dollar-neutral gold.  For the initial 4 years of today’s gold bull, gold was essentially only climbing in dollar terms.  It was reflecting the US dollar’s secular bear, but still largely flat in other currencies.  Euro gold revealed this extra-dollar reality, and continues to do so today.  It tends to filter out the dollar’s influence from gold.

The venerable US Dollar Index is today’s premier metric for tracking the dollar.  And the euro utterly dominates this 37-year-old construct at 57.6% of its weight.  Thus the euro generally moves in lockstep opposition to the dollar and vice versa.  So when gold rises in dollar terms, it could just be a response to Washington’s continuing dollar devaluation.  But when it rises in euro terms, it is really rallying globally independent of the dollar’s machinations.

A couple months ago when euro gold was down near €834 per troy ounce, I wrote an essay about those new record highs.  I pointed out that euro gold was not far from €1000 in percentage terms.  And a decisive breakout above these levels would likely spur big new gold investment demand, much like last autumn’s dollar gold breakout above $1000 did.  Investors chase proven performance and always get excited about big round numbers, so €1000 is a very important psychological level.

On a side note, a few European investors have told me they consider gold priced in grams, not troy ounces, so €1000 is irrelevant.  But most Europeans I’ve heard from think of gold in ounces because the global gold markets are primarily priced in US dollars.  Not to mention the US is where most of the world’s capital invested in gold is domiciled, and the great majority of gold commentary and analysis originates in the States.  And the popular national coins favored by European investors are in one-ounce denominations.  So even in Europe’s metric world, €1000 is a major psychological benchmark.

And gold’s recent surge that is challenging €1000 for the first time in history has been lightning-fast.  As recently as early April, euro gold had never even exceeded €835.  In 2009 and 2008 it averaged €698 and €593 respectively.  Between its latest interim low in mid-March (€801) and this week, euro gold has soared a breathtaking 22.5% at best.  This is a huge move in just 8 weeks, so euro gold is definitely overbought.

When dollar gold first challenged $1000 back in March 2008, it too had just rocketed higher in a fast rally.  Yet it wouldn’t ultimately break through decisively until 18 months later in September 2009.  Is euro gold fated for a similar high consolidation today?  Or can it break through €1000 soon without looking back?  Technicals generally argue for the former, while surging investment demand could still bring about the latter.

This first chart puts the recent euro-gold surge in context.  Euro gold is rendered in blue, per troy ounce of course, superimposed over the euro’s exchange rate with the dollar in light red.  While euro gold is certainly high today, its ascent doesn’t look too parabolic over this time span.  Euro gold has actually seen similar fast rallies in the past.  And although they corrected, euro gold continued marching higher on balance.

In late 2008 during that epic stock panic, euro gold blasted 26.3% higher in just 4 weeks before peaking near €673.  In early 2009 when a major US hedge fund was taking a huge stake in the GLD gold ETF, euro gold shot 28.0% higher in just 5 weeks before hitting an apex near €785.  And in late 2009 before the Greek debt crisis became news, euro gold surged 19.7% in 9 weeks and ultimately hit €808.

So within the context of this recent precedent, euro gold’s sharp 22.5% rally in 8 weeks is not wildly excessive.  If you average these earlier fast spikes, they rallied 24.7% over 6 weeks.  Not only is today’s rally smaller over a longer duration at this point, but it isn’t even close to being parabolic.  Dollar gold’s infamous late-1979 parabolic blowoff rocketed 128% higher in just under 11 weeks!  So 20% to 30% in 8 to 10 weeks isn’t even in the same league as classic bull-ending parabolas.

Nevertheless, euro gold is definitely overbought technically at today’s levels.  Its recent surge drove it far above its uptrend’s resistance line into a technical no man’s land.  And at this week’s high, it was trading 1.28x above its key 200-day moving average.  At Zeal our Relativity-based dollar-gold overbought signal triggers at 1.25x.  Whenever dollar gold moves up fast enough to stretch 25%+ beyond its 200dma, the probabilities overwhelmingly favor an imminent correction.  While I haven’t done any euro-gold Relativity studies, it wouldn’t surprise me one bit if it acts similarly to dollar gold at short-term extremes.

Also arguing against €1000 holding in this very first attempt, note the plummeting euro above.  As global investors’ euro fears reached a fever pitch in recent weeks, the euro has just collapsed.  Trading near $1.37 per euro as recently as mid-April, the beleaguered euro swooned as low as $1.26 last week.  A 7.6% plunge in the world’s second-most-important fiat currency in just 3 weeks is ridiculously fast.  Odds are such a move will not prove sustainable.

While it is incredibly fashionable to hate the euro these days, traders have to realize psychology affects currencies just like it does stocks.  Extreme fear is feeding this euro-to-zero craze, and extreme fear is never sustainable.  Remember back in March 2009 when the S&P 500 was trading under 700 and the whole financial world feared a new depression?  Stocks were wildly oversold and couldn’t stay at such depressed levels.  Even though seemingly-logical fundamental arguments were advanced to try and justify the stock markets’ low levels, in reality it was pure emotion.

As a whole, investors and speculators are never right at extremes.  They are the most scared right when prices are the lowest and they should be eagerly buying.  And they are the most greedy right when prices are the highest and they should be selling.  It is very easy to get caught up in the rampant fear at major lows and popular greed at major highs.  This is just human nature, the herd mentality.  Only the most diligent traders and students of the markets can purge themselves of these destructive tendencies.

Seeing the euro near its stock-panic lows today looks like one of the best contrarian buying opportunities I have ever seen.  Everyone fears the euro, and blood is literally running in the streets.  As Warren Buffett says, the time to be brave is when everyone else is afraid.  So I expect a wild euro rally once these irrational sovereign-debt fears pass, as they inevitably will.  I say irrational because Greece represents less than 3% of Europe’s GDP and all the troubled countries together only make up a small fraction.  Out-of-control emotions have made this whole episode a mountain out of a molehill.

And if the euro rebounds to $1.35 to $1.40, merely 7% to 11% rallies from this week’s levels, euro gold will face some serious pressure.  While the US dollar’s global dominance is waning thanks to Washington’s insane spending and endless money printing, gold is still primarily priced in dollars.  So gold priced in other currencies, including the euro, is a function of any currency’s exchange rate with the dollar and the dollar-gold price.

At a $1.35 euro and $1200 gold, euro gold would be trading near €889.  At $1250 this rises to €926.  And the higher the euro recovers relative to the dollar, the lower euro gold goes.  At $1.40, $1200 and $1250 equate to €857 and €893.  So more than anything else, even the overbought euro-gold technicals, I suspect the high odds for a sharp euro rebound rally will keep euro gold from easily hanging out above €1000 on this initial attempt.  Radically-oversold anythings, including currencies, tend to bounce fast.

So I doubt €1000 will hold for long given the current depressed euro environment.  Still, there is one major wildcard that could make it so.  Gold investment demand.  Ultimately global investment demand drives the gold price.  And here in the States, investors are starting to get excited about gold again as it easily holds above $1200.  Nothing begets new investment demand like record-high prices, so new capital is flowing into gold and should continue to flow into it.  American stock-investor demand for GLD alone has been staggering.

If investors here in the US and around the world continue to pour capital into gold investment, dollar gold could shoot high enough in the near term to offset a rallying euro’s retarding impact on euro gold.  If dollar gold hits $1350 or $1400 soon, which really isn’t as stretched as it sounds given this is just 9% to 13% higher than this week’s prices, euro gold could stay at €1000 at a $1.35 or $1.40 euro respectively.  I certainly wouldn’t bet on this possibility, as its odds are far lower than euro gold simply retreating.  Nevertheless, it is still a potential scenario to consider.

But whether euro gold breaks decisively over €1000 and holds it today or next year is really irrelevant in the grand scheme of this secular gold bull.  Sooner or later it will happen, there is no doubt at all.  The second time euro gold approaches €1000, it won’t be so overextended technically and will have a higher technical and psychological base to launch from.  I doubt it will take 18 months like dollar gold did from its initial $1000 attempt to its successful breakout.  €1000+ will probably become the new norm this autumn.

This secular gold bull, driven by powerfully-bullish fundamentals, is a global phenomenon.  Investors’ innate love for gold, and for bull markets, transcends borders.  The higher gold climbs worldwide, the more investors who have yet to invest in it decide to join the party.  And existing investors deploy more capital into this winner.  The net result is gold powering higher on balance in all currencies, including the euro as this long-term euro-gold chart reveals.

Euro gold didn’t start running significantly higher until today’s gold bull entered Stage Two, where global investment demand replaced the US dollar bear as gold’s dominant driver.  Provocatively the event that marked this transition was the euro-gold breakout above €350 back in June 2005.  After that, it was off to the races for euro gold.  And we’ve seen four major Stage Two uplegs since, along with a gradually-accelerating trajectory revealed by ascending support lines.

And euro gold has powered higher since mid-2005 despite the strong euro.  While the US dollar has long been in a secular bear, the euro has been in a secular bull.  Back in mid-2001 a single euro was only worth less than $0.84.  Then, like today, American analysts had a field day forecasting the imminent demise of the euro currency.  How could so many disparate nations, with their own agendas, keep their monetary and political union from splintering?  Believe me, the euro-to-zero trade is nothing new.

But somehow, Europe did hold together through all kinds of crises.  Its currency grew stronger and stronger in the face of the relentlessly weakening dollar.  By April 2008 as the US dollar hit an all-time low, the euro had powered up to almost $1.60.  Despite this massive 90.9% bull market in the euro, a strong currency by any standard, euro gold still continued to climb on gold investment demand.  To the very days of the euro’s best bull-to-date gains, euro gold still rallied 80.2%.  Gold’s bull transcends all currencies!

So even if the secular euro bull persists, euro gold will continue powering higher on balance.  Like all bull markets it will flow and ebb, seeing fast and exciting uplegs followed by necessary and healthy corrections to rebalance sentiment.  So if €1000 doesn’t stick soon, it is only a matter of time until it will.  For those naysayers today who claim €1000 will never hold, realize the same was once said about €500 and €750.  And while neither held on their first attempts, it was only a matter of months until each stuck.

It’s not that the euro is a great currency, it is another devaluing fiat-currency scheme just like the US dollar.  But unlike the profligate US Fed and Treasury, the European Central Bank is fairly conservative.  It runs higher interest rates than the US, making the euro more attractive to global investors.  It grows its broad money supply at slower rates than the US does.  And the world’s central banks and investors are way overexposed in dollars, so they need to diversify into euros and physical gold bullion.  The euro isn’t fantastic, but its fundamentals are superior to the US dollar’s.  It is the lesser of two evils.

So as we’ve witnessed for years now, both the euro and gold are destined to continue powering higher in their independent secular bulls.  And far more than Americans, European investors who remember their continent’s war-torn history (and failed paper-money schemes) have a strong cultural affinity for gold.  So the higher euro gold goes, the more capital Europeans will deploy in it.  Of course this creates a self-feeding virtuous circle, higher prices begetting more investment which drives higher prices.

At Zeal we’ve been studying and writing about this critical euro-gold bull since even before the €350 breakout.  Our subscribers learn about big moves in gold before they happen, when they can still deploy capital in cheap gold stocks to leverage these upcoming uplegs.  We are heavily deployed in gold and silver stocks today, riding this spring gold rally which I’ve been telling investors was coming for months.  Our subscribers’ unrealized gains are large and growing fast, they were ready for gold to surge.

For just $10 a month, a trivial sum for any investor, you too can get prepared for big future moves in the markets before they happen.  For a decade we’ve specialized in commodities-stock investing and speculating, including gold and silver stocks.  Our subscribers have leveraged our hard work and endless research to multiply their capital many times over and grow their fortunes.  You ought to join us!  Subscribe today to our acclaimed Zeal Intelligence monthly newsletter!

The bottom line is euro-gold €1000 is a very important psychological milestone in this global gold bull.  Just as $1000+ did here in the States last autumn, €1000+ will make gold far more appealing to legions of European investors.  Their buying will drive gold even higher.  So to see €1000 challenged this week for the first time ever, even if it doesn’t hold, is very exciting.  Gold history is being made before our eyes.

While probabilities favor the super-oversold euro bouncing and scuttling this initial €1000 attempt, it is only a matter of time until this level holds for good.  Euro gold has powered higher on balance for years despite the simultaneous strong bull market in the euro.  While it isn’t as bad as the dollar, ultimately the euro is just another devaluing fiat currency that investors can help protect themselves from by owning gold.

Adam Hamilton, CPA May 14, 2010     Subscribe


Friday, May 14, 2010

So What is the Real Risk in That Position?

This was to have been written a while back, and in many ways I wish that I had managed to do so before last Thursday’s meltdown. Originally intended to show how a stop loss order is poor protection against an overnight gap, it turns out that the same principles are relevant even to a very steep intraday decline which leaves one unable to place orders; which when we come to think of it, is really no different from a sudden (i.e,. overnight) gap.
In our last write-up, we examined position sizing and how to determine it. In doing so, we used a stop loss as a measure of maximum risk.
Let us recap. (We were talking of a entering a long position).
Account Size = 40k
Maximum risk per position = 2%
Hence our maximum that we are prepared to lose in a trade is 2% of 40,000 = $800.
We then postulated that the maximum tolerable loss per share would be $2.50, so we came up with:
Number of Shares to buy = 800/2.5 = 320.
So buying a round lot, we buy 300 shares, reducing our total risk to $750; if we want to maintain our risk at $800, then we can increase our stop loss to $2.66.
If the details are sketchy, you can always review the first post here: How Many Should I Buy ?

Is That Really Your Maximum Risk ?
There are really only 2 ways to place a stop loss order: either a “Stop Market” order or a “Stop Limit” order.
Let us assume the worst, and say that after you placed this very well thought out trade on the close, you woke up the next morning to see a $5 drop overnight (or alternatively, during the next day, the market took a sudden dive after the manipulators decided to withdraw all bids in a show of force to stop politically inspired reform, or for whatever reason).
Let us take a look at what would happen.
  1. You had a StopMarket order.

    You will be filled at whatever price the market maker decides to fill you, albeit it will most probably be no lower than the bid at the time that you are filled. Remember that you are selling, so a market order is at the bid. Nothing stops the market maker from waiting for a while for the price to drop some more before you are filled. Of course, you can complain to your broker, with screenshots to prove it, and the difference MIGHT be refunded to you.

    The net is that you will probably be filled at a price $5 less than you entered at, a total loss of $1,500 on your account; a far cry from what you had planned.

  2. You had a stoplimit order

    The current price is so far below the minimum price that you are willing to accept, per your limit order, that your order is not filled. You can then choose to wait, smoking copious hopium, or decide to liquidate at market.

    If you choose to wait, then you will get filled at the time that the stock is moving back up, in the original direction that you wanted the stock to be moving. Oops.

    If you are unwilling to take the loss, and move your stop below the current price, you have compounded your probable loss, with only hopium to show for it.
If you are really unlucky, and the stock faced a $40 drop, you would be out $12,000 ! You think it cannot happen? Remember Bear Stearns? OK. So that was a black swan event. Ask those to whom it happened if they care about the color of swans.

Regardless, when you use a stop loss for risk control, the real amount that you have at risk, is the entire position, even if it is a far fetched possibility. The stock CAN go to zero.

So What To Do Instead ?
What if I told you that there is another kind of equity that you can purchase which will ABSOLUTELY GUARANTEE that no matter how far or fast your original stock price dropped, you can sell this new equity at a specified guaranteed price, no questions asked? What this means is that even if the stock dropped passed your original stop loss point, you can just walk away, knowing that you are covered, and you absolutely CANNOT lose more than you had originally planned. No need to worry if you cannot place a trade because there are no bids; no need to even think about how much further the stock can drop.
Does that sound too good to be true? Well, this is one instance when it is not too good to be true. Of course, there is a cost: you have to buy this instrument, thereby sacrificing a part of your profits, most probably, but not necessarily. If it still sounds too good to be true, let me ask you another question. If I said that I could sell you a contract, such that if you had a car crash that damaged your car beyond repair, we would give you money to buy another car, would that be too good to be true? Of course not: you are required to purchase such a contract; it is called “Insurance”.
Well, basically, when you buy car insurance, what you have done it to get the right, under very specific circumstances, to PUT you car into the Insurance Company’s name, and get paid for it. We all know that when the crash happens, the insurance company will go into an “Muhammed Ali Shuffle”, as it tries to find all manner of reasons not to pay up.
Fortunately, when we are dealing with stocks, there is another authority that ensures that the insurance gets paid. By now, you must have figured that that authority is the OIC, and I am talking about PUT options.

So What Are The Mechanics ?
Instead of returning to our fictional company, let us look at a real stock, assuming the same account size and risk parameters.
As we already know how to efficiently trade options, we shall select a stock where we can put that knowledge to use. As always, THIS IS NOT A TRADE RECOMMENDATION: it is an illustrative example. If you are unclear about that, please read the disclaimer at the bottom right corner of this page; then read it AGAIN.
Knowing that everything in this market is bullish, we shall go back to last Wednesday, May 5, 2010 to place out trade, and see how it would have played out. We shall take the ultra efficient IWM for our vehicle. Our data will come from TOS thinkback. Very nice.
Purchase price = IWM MOC @ $69.92
Stop Loss = $67.30, placed $0.09 below the swing low on Apr 1, 2010. As good as any. You just need a good reason to select a reasonable stop.
Therefore, risk per share = $2.62
Risk on account = 2% of 40k = $800
Therefore, Number of shares = 800/2.62 = 305+
We purchase 300 IWM MOC @ $69.92 = $20,976
This means that, basically, half our entire account is in one position. This is clearly not desirable, but it is a great way to illustrate this point, and (later) how to trade the same position without tying up so much of the entire account.
We all know what would have happened on Thursday to our position, so let us not dwell on that. Instead let us see how we could have protected our position better than the stop loss did.
Looking at the June PUT options (ask price, rounded for easy calculation):
June 69 PUT: $2.00
June 70 PUT: $2.30
June 71 PUT: $2.70
In order to determine what our choice is, we assume the worst: the IWM tanks to zero! Of course, we know that is almost impossible. That is not the point. The point is that if this were not the IWM, but a stock, it could go to zero. Remember Enron? If the stock went to zero, we can immediately sell our option for the strike price, if not slightly more.
Let us see what each option purchase then affords us.
  • June 69 PUT
IWM purchase price = $69.92
June 69 PUT purchase price = $2.00
Total outlay = $69.92 + $2.00 = $71.92
Proceeds from sale of PUT = $69
Total loss = $71.92 – $69 = $2.92, a bit more than the planned $2.62, but certainly better than losing the entire trade because you could not get out quickly enough.
  • June 70 PUT
IWM purchase price = $69.92
June 69 PUT purchase price = $2.30
Total outlay = $69.92 + $2.30 = $72.22
Proceeds from sale of PUT = $70
Total loss = $72.22 – $70 = $2.22. Actually LESS than the planned loss of $2.62! And you can hold the trade even while the IWM was tanking.
  • June 71 PUT
IWM purchase price = $69.92
June 69 PUT purchase price = $2.70
Total outlay = $69.92 + $2.70 = $72.62
Proceeds from sale of PUT = $71
Total loss = $72.62 – $71 = $1.62 !!!
So it would appear that using PUT options instead of a stop loss, is at any rate reducing our risk.
That is all fine and dandy, but it does not tell the whole story. Here is the rest of the story. You PAID money for that PUT, so that means that your profits, if the position were to be profitable would be reduced by what you paid for the puts. There is no such thing as a free lunch.
Options pros have a name for the position that has just been created. It is called a “married put”. Married Put = long stock + long option.
How does this affect us?
Let us assume that you have a target of $74 (just under the April 2010 high). We are not looking at the merits of a trade that would have in the first instance appeared to have risked $2.62 (the stop loss) to make $4.08 ($74 – $69.92 purchase price); we are illustrating a principle here. If that is the case, then we assume that you would have sold the position at $74. So, when you liquidate the position, here would have been the various profits.
Profits = Proceeds - total cost of entry
Profits = Proceeds – (cost of stock + cost of put)
Profits = $74 – ($69.92 + cost of put)
  • June 69 Married PUT
Profits = $74 – $71.92 = $2.08
  • June 70 Married PUT
Profits = $74 – $72.22 = $1.78
  • June 71 Married PUT
Profits = $74 – $72.62 = $1.38

Naturally, these figures would look a whole lot better if you had a higher target price.
However, continuing with our $74 target, as we have decided that no matter what, we are getting out at $74, why not then use another equity to ensure that if we breach $74, we are going to get paid $74. Better yet, if we do NOT breach $74, we get paid anyway!
You guessed it: we sell the June 74 Call for $0.96.
Once we do that, we have capped our loss. but we have also capped our profits. Just add the $0.96 to each scenario to see what have. Options pros, call this position a collar. Collar = long stock + long option + short call.
  • June 69-74 Collar
Max Profits = $74 – $71.92 + $0.96 = $3.04
Max Loss = $2.92
  • June 70-74 Collar
Profits =$ 74 –$ 72.22 + $0.96 = $2.74
Max Loss = $2.22
  • June 71-74 Collar
Profits = $74 – $72.62 + $0.96 = $2.34
Max Loss = $1.62

You can calculate the risk to reward ratios for yourself.
That concludes this write up. The only thing left to note is that we have constructed a position where both our risk and our reward are capped, regardless of what happens to the stock. Does that remind you of something else? Remember that even though you have now totally limited your risk, you have still tied up half your account in one position. Even if your total possible loss is small, tying up half your account in one position can hardly be described as efficient.
Our next write up will tackle that question.
As one last parting note, what would be our current position if we had made this trade, and then been forced to sit through last Thursday’s meltdown?
  • At the end of that scary Friday, May 5, 2010 - ~$200 loss after that scary drop and return. And you sat all through it, drinking a latte, while the position tanked way past your original stop loss, but you stopped losing money.
  • At the end of today, May 13, 2010 - – position has returned to profitability, and all because you did not get stopped out by that insane market downturn.
Finally, the 71-74 collar shows a total per share risk of $1.62. The question then arises. Should we increase our position size to 500 shares, so that our risk is just a shade above the $800 we talk about? Well, we could, but then our cost of entry has gone up to $72.62, meaning that we would be using $36,310 for the position. For all practical purposes we would have tied up our entire account in one position. Oops.

- Authored by Osi

Thursday, May 13, 2010

Getting Messy

By the way TTWrs: I think we might have missed wishing DDT a Happy Birthday, but better late than never. He's a Taurus- isn't that ironic? HA!

He has his hands full, and so do I, so I know he appreciates you regulars who keep the ball rolling over here during the day. Hat's off to you all for that!

I'm tossing up a few basic charts to look at. Nothing fancy, just the simplest of things to pay attention to. I'm monitoring the NYMO intra-day and it went up to -11 today before it pulled back, so no touch of the zero line, but that might be good enough for a short-term pullback.   The IHS I shared on the dollar seems to have worked out well so far too, but it’s getting frothy up here, and the EUR, although hitting new lows today is facing support from below at the ‘08 low.

We all know the games that are played during OPEX though, so be on your toes in both directions. That's my best advice. I'm still watching/waiting for next Thursday as it has a lot of what Joe8888 calls vibrational "stuff" surrounding it.  Laundry followers are keeping a keen eye on that day, too.  For you loonies, we're in the New Moon phase now.. will that work? I don't know, I continue to err on the side of caution either way, and keep the tin foil adjusted.  No wave counts, nothing fancy, just trade the tape they give us and expect to have them not make it easy.

The VIX is of special interest here for certain, and the knuckle draggers are once again warning the peasants to buy put protection after last Thursday's tank-a-puhloozah, so volatility could be getting itself very cozy at elevated positions.

Good trading to you all, and have a good Friday!

spx_5_13_eod vix_peak_tl
dx_5_13_eod eur_5_13_eod

DDT.. no kvetching about your birthday either.. just give this a good listen when you get back to the blog.  ;-)

Tuesday, May 11, 2010

Mixed Bag

$SPX Resistance 1171-1176, weak support 1147.80 for now, today's market action did not add any clarity to which out of 4 possible scenarios (published at Members Site) is in progress, for now – SPX is in possible wave A on daily which might be 3 or 5 waver and if so, 30 minutes wave structure playing along quite well.


I, personally, do not believe that 30 minutes wave represents true picture because 1024 downside w5 target will completely erase daily wave 5 which, for the lack of the better word is PERFECT as of now.



I will probably give the new and unusual reason to criticize me (probably that is going to be the very same people who called me "bear" when I was heavily short at 1200-1205 level and pointed to diamond/rooftop on hourly in progress – but that is fine with me, I cannot make everyone happy and I don't like to give prognosis that fits any outcomes…), but I have AT THIS POINT and after what happened on Thursday big problem trying to fit any reasonable extended downside scenario.  Instead – I prefer to go with extended wave 5 on daily (target still 1330sh) and therefore 10 min wave fits reality much better – calling for small drop tomorrow and more upside after that.

2010-05-11_2111 Pleased to announce that TTW is in talks with and there is a possibility that real time emails for Members Site will include most current 3c analysis