Off topic again...Who is John Chow? He was briefly mentioned in my earlier post. Nay, he is not a trader. He is just THE guy making big bucks (> $10,000) from his blog and he makes it sound so easy to make money online. And here's what you get in return for reviewing his blog. If you are into making money online, check him out. Smart guy!
Finally, we've got a day of good trending - to the upside. The market opened lower on poor durable orders data, but quickly regained its footing once it hit the lower bottom of the channel on 15 min chart (see below). It's the FOMC policy statement day on Thurs. I don't usually like to predict the direction of the market, but I'm slightly leaning to the bullish side. The market has corrected a fair bit so far and my guess is the big guys out there will take this chance to interpret the FOMC statement positively and push the market up for Q2 window dressing. But then, I could be very wrong, so please do your own due diligence and let the market lead you!
It is amazing how the E.I.A. Statistics provided the market a lift up when usually the low inventory is bearish on the market, although the rally on energy stocks is understandable. I guess when the market wants to bounce, it will find any reason to do so. Here's a daily chart of OIH, with clear support from 20MA
And here's a 5 min chart on OIH if you wanted a low risk entry trade. Typically on such very bullish inventory numbers, expect another leg up after the initial spike at 10.30am (when the EIA statistics is released). The trick is to wait for pullback, then look for low risk entry because the OIH can be very volatile.
Last week was down on heavy volume. This coming week will be interesting because we have several key economic data coming out, most importantly, Fed Policy Statement on Thurs. But also not forgetting Q2 is coming to an end, so watch out for window dressing!
Mon: Existing Home Sales
Tue: Consumer Confidence, New Home Sales Notable earnings: KR, NKE, LEN
This is not related to trading. But this is good stuff and wanted to share with my readers who maybe interested. I chanced upon KC Hut's post: The Battle Between Two Greatest eBooks - John Chow VS Yaro. Both John Chow and Yaro are gurus in the area of making money online. They have both recently written an ebook each and the books are available for download for free. Each book is a solid 50+ page!
Floor talk: Taking a look at call buying in stocks with M&A rumors
It has become a regular observation to see increased call buying coincide with M&A rumors as of late, as the purchase of a call option can offer a leveraged "bet" on an upside move in a stock, with additional gains coming from the possibility for rising implied volatility. In fact, it is becoming such a widespread trend that many of the major financial media outlets have begun to regularly highlight examples of heavy options trading in reaction to M&A rumors in stocks, sometimes as a way of adding their own perceived "validity" to the rumor being discussed. While the magnitude of options activity within each individual "rumor-stock" is widely varied, the typical reaction to an M&A rumor in the options mkt involves increased near-term call buying, with a focus on the upside contracts. Buyers of these options hope to profit from the rising value of the call options, which can be the result of two potential factors (often occurring together):
1) the stock price rises as the rumor catches on in the equity mkt, causing the value of the option price to rise simply as a function of option pricing models; and
2) implied volatility rises as market-makers raise their offers to keep up with the surge in demand for these options, also leading to higher options prices.
We wanted to highlight this recent trend as our Options Activity comments often include options that are trading in stocks that are the subject of M&A rumors. We're not saying the options activity necessarily validates a rumor, but it does attract attention and there are a few examples of this type of activity today in NFLX, TSN and FCX. To look at the TSN example in more detail, we note that TSN stock saw a quick 0.60 move to the upside as a takeover rumor made the rounds. The Jul 25 calls saw the most buying in reaction to the rumor and coinciding move in the stock, with a total of 14.2K shares trading on the day. This compares to open interest of only 1440 contracts, which means before today there were only 1440 open positions in these calls. The price of these options rose to 0.45, up 350% from yesterday's closing price of 0.10, on a combination of an increase in the stock price and increased implied volatility. It's worth noting that DJ reported this afternoon that the TSN sees no basis for takeover rumors.
Source: Briefing.com As Briefing rightly pointed out, such options activity does not necessarily validates the rumour, in other words, if you choose to buy a call option on such rumours, it is a speculative trade. If you wish to enter a speculative trade, please trade carefully and take note of the following:
-Risk only a tiny tiny portion of your capital. My own benchmark is to only risk whatever I'm prepared to lose 100%. If $500 is your threshold, which breached will cause you to lose sleep over it, then DO NOT place more than $500 on this trade
-Keep to day trading for such trades if possible
-If you hold overnight, be prepared to lose 100% of it overnight. Because if the speculated companies come out to state its stand that such rumours are groundless after market close or before market opens the next day, the stock is likely to come crashing back to earth and there is nothing you can do about it.
-If you plan to hold it for a few days, do take some profits off the table along the way and adjust your stop accordingly.
I have learnt a great deal from Dr Brett on reading the market pulse and the above idea is one of them. Before I proceed further, I wish him speedy recovery. Dr Brett is down with acute appendicitis and his daily insightful posts will be missed by all.
The blue line represents SPY, the pink line is the number of stocks making 20 day High less number of stocks making 20 day Low. I started tracking this in June, however I have a few earlier data points missing for the pink line, just ignore them.
Two points of observation from this chart:
1) During the sell-off earlier this month, we see a higher low (dotted yellow line) registered in both blue and pink line, thus confirming that a bottom has been reached.
2) We started to see divergence on 19 Jun, where the SPY continued heading up, but clearly, the momentum is lacking as reflected by the pink line. In fact, the momentum starting waning on 18 Jun.
Today's market tumbled, which is not surprising, given the above momentum waning and the indices unable to close above their previous high. Study the charts! Here's a few places to study them:
"An unprecedented coalition of large companies, pension funds, and trade unions will on Monday urge corporate America to scrap quarterly earnings guidance in an attempt to curtail the influence of hedge funds and other short-term investors......continue here"
This move, if succeeded, is definitely bad news for short-term investors and traders alike. There is less transparency and in fact from a contrarian view point, I think this move will subject the stock price to greater fluctuation should a surprisingly good or bad earnings result comes about as there is no prior guidance for some sort of bench mark. Without earnings guidance, it will be hard for short-term investors to manage their positions as they are unable to tell if the reported good (bad) earnings results for one the past quarter will continue in the next few quarters.
Last week, we saw the major indices rose steadily in the last 3 sessions, regaining ground after the sell off on interest rates hike concern. S&P 500 and Nasdaq were both supported by 50 MA. Of the 3 indices, Nasdaq has already shot past its previous high before the sell off; S&P 500 and DOW are still a little shy of overcoming those highs. The previous high now act as resistance and tt is critical for them to clear the previous high for the uptrend to continue.
Tue: Building Permits, Housing Starts Notable earnings: BBY
Wed: Notable earnings: CC, CMC, FDX, MS
Thurs: Leading Indicators, Phil Fed Notable Earnings: JBL, COGN
Kevin had a great post here about using the bond market (TLT) as a leading day trading indicator. Since I last talked about bond yields, I've also been using the bond yield market as a cross reference for my OEX options day trades. The above is a 5 day chart of 10 year bond yield (TNX) vs S&P 500. As you can see, the S&P 500 index is the complete mirror image of the 10 year bond yield. In the case of TNX, it used to lead by about an hour as well (as what Kevin observed in TLT). However, in the recent days' market activity, I realised it has stopped leading by an hour. Its turning point is now more or less in synch with the stock market indices. Perhaps too many traders are using it as a leading indicator that it has lost its effective? Anyway, what I do now with TNX is to use it as an additional confirmation, along with the other tools such as TICK, pivot points, support and resistance and ES futures for my OEX day trades.
Here's a look at the 5 min chart of TNX. Notice how the opening gap on Tue has served as a support area. 5.20% is another level to watch for support. On the other hand, the current Fed rate of 5.25% (yellow dotted line) is an important resistance level where many traders will keep an eye on.
Ever wanted to automate your stock (or option) analysis? Want to download historical stock data but don't know how? Where to get ready-to-use script of simple programming for free? My friend, a fellow graduate from the same options school has set up Excel Stock-Data. With an interest in options trading and talent in programming, he is generously sharing his knowledge for free. Here's what you can get from his website:
- Download Stock Data (Historical) - Download daily stock data - Download other financial data - Working on raw data (compare..) - Download files, charts - Optionable List - Technical Analysis (MA, RSI, MACD)
For those of you who have always wanted to pick up some simple programming tricks that is applicable to your analysis of stock picking, this is an excellent site!
The Bulls climb the stairs while the Bears take the escalator - this is again aptly demonstrated in the sell-off last week. The up trend lines in DOW, S&P 500 and Nasdaq were clearly broken and while the bulls successfully defended their territory on Fri, looking at the economic calendar below, there are many land mines in the week ahead for the Bulls:
1) We've got heavy weights like Mr Greenspan and Mr Bernanke speaking this week. As we know, Mr Greenspan has a record for rocking the market with his words and I don't want to count his speech at the Commercial Mortgage Securities Association as an exception.
2) With rate hikes causing increasing tension in the market place, be aware of BOJ interest rate announcement this Thurs (tentative). With the Yen carry trades impact we've had earlier, any rate hike from BOJ will surely send the market sinking.
3) Options Expiration Week
4) Earnings announcement from leading investment banks like GS, LEH and BSC will also set the tone for investment activities and the growth ahead. Mon: Notable earnings: JOSB
Tue: Treasury Budget, Alan Greenspan speaks at the Commercial Mortgage Securities Association Notable earnings: LEH
Wed: Retail Sales, Business Inventories, Fed's Beige Book
Thurs: PPI, Fed Hearing on Mortgage Regulations, Bank of Japan (BOJ) interest rate announcement (tentative) Notable earnings: ADBE, BSC, GS
Fri: Options Expiration, CPI, Fed Chairman Bernanke Speaks at the Atlanta Fed's "Credit Channel of Monetary Policy in the 21st Century" conference
GOOG and ILMN broke out yesterday on higher than average volume. I still like to keep these stocks on my radar to watch for pullback to enter. Of course GOOG is too expensive for my liking. But for those who have a bigger appetite, you can monitor it closely.
RVBD and FSLR are close to breaking out. Assuming all things equal and just looking at the charts, I'll prefer to go with FSLR. Why? Because the trend line for RVBD is too steep and is usually not sustainable.
The major indices took a tumble as the markets were all eyes on the 10 year yield ($TNX) hitting the 5% mark. This is the highest levels since last summer.
As a trader, it is important to know the inter-market relations between bonds, stocks, gold, currencies and commodities. I have always wanted to learn more about them, but never got around to doing so. Noting the market interest in bond yield lately, I (finally) did some reading on it during the last few days as I'm not very familiar with this topic. A few questions came to my head: Why the rise in bond yield? What's the fuss all about? What's the implication for stock market? As I attempt to satisfy myself with these amateurish answers, please feel free to comment on them.
Why the rise in bond yield? The ISM Services Index reading on Tue was the highest since April 2006. Together with the recent positive economic data, this signals a strong economy and erased any hope of Fed easing rates anytime soon. So traders anticipating this bid up the bond yield as rising yields contain economic growth and inflation.
What's the fuss all about? It boils down to the chart (see above). 10 year yield has just broken the late Jan high and now heading towards a psychological 5% mark
What's the implication for stock market? Theoretically speaking, the bonds market has an inverse relationship with the stock market. Because higher yield would be more attractive to investors and assuming they have fixed dollar amount for investment, they will switch some of their funds from stock market to bonds market. But theory is just theory. So far, the rising yield went hand in hand with the rising stock market. Until yesterday that is. The stock market took a bearish turn amid the 10 year yield threatening 5% level. I think it will make another attempt today to cross 5% if the Nonfarm productivity report is aligned with the ISM index reading. But it will be interesting to see if the stock market will continue to move in the opposite direction of bond yield.
Late Apr, I talked about 3 stocks to watch for potential breakout. IR was one of them. It was then forming an ascending triangle and had a false break with its earnings announcement. As I've said in that post, I don't recommend holding positions over earnings announcement and this chart is a good example why you shouldn't. Because if you held it as swing trade and didn't profit take, then you would have been stopped out for a loss on 30/4.
IR then went out for a real breakout and on 15/5, it gapped up nicely on news that it is exploring strategic alternatives for its Bobcat and Construction-related businesses. It then went on to test the low of the gap several times and defended it successfully. $48 is now a strong support. Continue to keep this stock in your watchlist as it has strong technicals and also the chance for potential spin off means it may gap up again if it materializes. Look for pullback.
IR also presented a low risk intra day trade opportunity yesterday. The first chart is a 15 min chart, followed by 5 min chart. Jamie has traded many of such base & break setups. Check out his blog for more examples.