Thursday, December 31, 2009

Looking Backward

There has been much happy talk and celebration in the financial media about 2009, as blue chips (SPY) charged up from 90 to today's close of 111 for an increase of 23%.

Happy days. Happy days.

I love parties as much as the next trader, and swoon with joy at the sight of bubbles and flying corks. But it would perhaps be good to pause and remember the realities before we all party on.

After all, this year's 23% rise follows last year's 23% loss, and since with percentages you always must work harder to gain back your losses, we really have very little to cheer about. (Basic math: A 50% loss requires a 100% gain to get back to where you began.)

The rise this year was truly a Back-to-the-Future moment. It put the blue chips where they were in 2008. And 2003. And 2001. Truly, as we survey the market, we can say, "Been there, done that".

Not only a year but a decade is ending. Had you bought shares of SPY on the first day of trading in January 2000, at 148, you would be down 25%. Despite all the storm and fury of a decade's worth of trading, you did as poorly over 10 years as you did amidst the smoking ruins of global finance in 2008.

If you were a buy-and-holder, as most people are with their retirement accounts, you would be losing money on every share of Vanguard's S&P500 fund that you bought in 2000 as well as the first 10 months of 2001. You would also be losing money on shares you bought through all of 2004, 2005, 2006 and the first nine months of 2007.

Altogether, you would be showing a capital loss on the shares you bought for 67 out of the decade's 120 months.

As a smart trader, you surely would have done much better with short-term strategies, despite the cost in fees. But 401(k) administrators discourage active trading of the mutual funds they run, so we must work within those restrictions.

The chart shows as 12-month simple moving average for the decade.

If you had moved your 401(k) stocks to cash and back into stocks at the moving average crossovers, you would have traded four times in the decade, and your total gain would have been 73%.

The chart also shows the Person's Proprietary Signal, the black-box indicator that I use for my short-term trading.

If you had followed the pps signals, you would have gained 48% for the decade.

(The proprietary signal gave worse results than did the simple moving average, which was no doubt used by the ancient Sumerians to manage their barley futures. Hmmm.)

I take four lessons from all of this:

* Happiness in analyzing the markets depends upon what end-points you choose. January to December 2009 gives a great gain. October 2008 to March 2009 gives a gut-wrenching loss. So take this week's happy-days stories with a grain of salt -- they are all special pleading.

* A buy-and-hold strategy works fine in an unrelenting up market. In the 1990s, trading in and out with the moving average crossovers would have yielded much the same results as not trading out at all. In a sideways market, like the 2000s, a trading strategy is vastly superior. But, a trading strategy will keep you in the market during a 1990s-style rise.

* The sophistication or complexity of a technical indicator is no guarantee of its success, as the results of the simple moving average compared to the pps shows.

* Even a 74% gain for the decade is nothing to cheer about. That's 7.4% a year. Inflation during the decade averaged 2.8%, so your net annual gain was a mere 4.6%, less than what you would pay these days for a 30-year fixed rate mortgage. (That's ignoring interest on cash, dividends and fees on the mutual fund.)

Could you better that with short-term options strategies, where percentage gains are routinely in the double digits? Bet so.

As a trader, I can't pass up the opportunity to try to work our newfound knowledge into my short-term options perspective. Perhaps this would do.

I make the assumption that I will know by the 20th of each month where the price will close in relation to the 12-month moving average. There might be some false signals, but generally, it would be pretty clear. That assumption puts me 20 to 30 days before expiration, most months, perfect for vertical spreads. Therefore, these rules:

  • If in the last 10 days of the month the price of the monthly bar is above the 12-month moving average, then open bull vertical spreads.
  • If the price on the last 10 days of the month is below the average, then open bear verticals.
  • If the price retraces over the moving average once a position has been opened, then close the position.
  • Set a stop/loss at 2% or just beyond support, whichever is closest to the entry price.
I haven't back-tested that method, but it seems workable.

So, party time! Pass the champagne and join me in bidding a not-so-fond farewell to the decade of the zeros.

And have the happiest of New Years!

Topics: 401(k), IRA, Individual Retirement Account

12/31 Watchlist

Blue chips (SPY) are showing a potential pps bear signal, on a decline from open to now of only about half a percent, as trading enters its last 90 minutes. The slow stochastic and macd are heading toward similar signals, although they're aren't quite there yet.

The price overlaps the range of the last five trading days, so SPY is not yet breaking out.

Volume on SPY at this point is running only at about 51 million shares. The last normal Thursday before the holidays, Dec.  18, saw 183 million shares of SPY traded. So whatever the signals mean, this is not a broad based movement yet.

The fear index (VIX), not surprisingly, is showing a bull signal (to be bullish on fear is to be bearish on stocks).

Otherwise, no excitement on the indicators.

In currencies, the yen per dollar (USD/JPY) currency pair is trading nicely above support.

No movement to speak of among my holdings, including even SBUX, which since Wednesday is under a bear signal that runs contrary to my position.

And speaking of normal, on Monday the markets will be back to normal (whatever "normal" means when it comes to trading). I'll be producing scans for signals of high-volume stocks and etfs, as well as trolling for covered call opportunities, as part of the daily Watchlist.

12/31 Morningline

The markets open on the last trading day of the year, with no new signals.

SBUX, one of my holdings, opened comatose at the upper end of yesterday's trading range following a bear signal at Wednesday's market close.

  • Blue chips (SPY) open at 112.77, entered bear mode at close on Dec. 8 (at 109.61)
  • Fear index (VIX) 19.96, bear (bullish for stocks), Dec. 22 (20.49)
  • Treasury long bonds (TLT) 89.76, bear, Dec. 21 (91.14)
  • Gold (GLD) 107.98, bear, Dec. 17 (108.00)
  • Oil (USO) 39.39, bull, Dec. 16, (36.74)
Currency pairs:
  • Dollars per euro (EUR/USD) 1.4337, bear, Dec. 4 (1.49)
  • Yen per dollar (USD/JPY) 92.41, bull, Dec. 15 (89.60)

Holdings, January expiry, no new signals:
  • KO, iron condor (p50/-p52.5/-c57.5/c60) 57.58, bear, Dec. 29 (57.74)
  • LVS, covered call (-c16) 15.08, bear, Dec. 18 (15.29)
  • SBUX, bull put spread (p22.5/-p24) 23.34, bear, Dec. 30 (23.31)
  • SMH, bull put spread (p27.5/-p29) 28.20, bull, Dec. 21 (27.62)

    Wednesday, December 30, 2009

    Thinking about the SBUX bull position

    In the Watchlist I noted a new signal on SBUX contrary to my bull position, and then said I didn't intend to act at this time.

    I am breaking my own rules, and fully expect you to shake an angry finger in my face while accusing me of gross trading hypocrisy. "Dash it all, Man," I can hear you say with fiery disappointment. "Art thou mad?"

    So why am I behaving in such a reckless fashion?

    Firstly, there are the holiday doldrums. Trading volume is down (i.e., the market is illiquid) because so many players are off the field to be with family and friends, or to prepare for a lonely New Year's Eve of solitary drinking at their local brew pub. I distrust signals given in low volume markets, and hate to trade in such markets. It's hard to get the price I think is fair because there are fewer working traders who can take the other side of the transaction. This is the Sargasso Sea of the market year, where traders lie becalmed and helpless.

    Secondly, there is my location two weeks out from expiration of this January bull put spread (p22.5/-p24). This was a credit spread -- I made money when I opened it -- and I want to hang on to the position as long as possible for maximum profit as the long, 22.5-strike puts disappear due to time decay.

    Thirdly, there is the structure of the position as it relates to price supports on the underlying stock. This vertical spread is profitable at expiration from about 23.38 and up, and at about the same price point if I were to close it now. The sideways movement of the past six trading days shows 23.15 or thereabouts as its lowest point. If there's a bounce off of very near term support, as often happens, then I'm very close to being minimally profitable. And with a bigger bounce, maximally, given that upside resistance is 59.45.

    Fourthly, SBUX earnings will be announced after market close on Jan. 20. The stock has every reason to show increasing volatility in the next few weeks. That could work in my favor.

    So, all things considered, it seems like a reasonable risk to wait until the first trading day after the holiday, Jan. 3, to see what happens. Besides, rules are made to be broken, no?

    12/30 Watchlist

    This is the way the world ends
    This is the way the world ends
    This is the way the world ends
    Not with a bang but a whimper.
                    -- T.S. Eliot, The Hollow Men) (1925)

    Much the same can be said for the year in the markets.

    At the end of the penultimate trading day of the year, little movement in the indicators, the currencies and most of my holdings.

    The exception is SBUX, which is showing a new bear signal on a small decline. My position in this stock is a bull put spread (p22.5/-p24). The pps bear signal is echoed by the Stochastic, and about to be echoed by the MACD and the Money Flow Index. My stop/loss on SBUX is 22.5, and the trade already has a small loss. So I may have a decision to make about SBUX beyond the usual venti or grande.

    In an earlier age I would exclaim, "This is a pretty turn of events." In our time, so parsimonous with words, I shall simply say, "Bummer!" But I don't intend to act  on the position at this time.

    The potential bull signal that showed on the VIX this morning has melted back into the pasture, no doubt intending to graze a bit longer. The chart, at present, remains bearish on fear.

    12/30 Morningline

    Small opening gaps in blue chips and gold. Potential bull signal on the fear index (bullish on fear is bearish on stocks). Here's the rundown:

    Indicators, with none showing much movement after opening:
    • Blue chips (SPY) open at 112.23 on a 0.3% gap down, entered bear mode at close on Dec. 8 (at 109.61)
    • Fear index (VIX) 20.36, bear (bullish for stocks), Dec. 22 (20.49). Bull signal if it remains on the chart at the close.
    • Treasury long bonds (TLT) 89.92, bear, Dec. 21 (91.14)
    • Gold (GLD) 106.64 on a 1% gap down, bear, Dec. 17 (108.00)
    • Oil (USO) 38.95, bull, Dec. 16, (36.74)
    Currency pairs:
    • Dollars per euro (EUR/USD) 1.4352 and falling, bear, Dec. 4 (1.49)
    • Yen per dollar (USD/JPY) 91.98 and rising, bull, Dec. 15 (89.60)

    Holdings, January expiry, no new signals:
    • KO, iron condor (p50/-p52.5/-c57.5/c60) 57.74, bull, Dec. 29 (57.74)
    • LVS, covered call (-c16) 15.22, bear, Dec. 18 (15.29)
    • SBUX, bull put spread (p22.5/-p24) 23.34, bull, Dec. 18 (23.68)
    • SMH, bull put spread (p27.5/-p29) 27.61, bull, Dec. 21 (27.62)

    Tuesday, December 29, 2009

    12/29 Watchlist

    Little movement since this morning's Morningline.

    The pps bull signal that appeared on the EUR/USD chart this morning appears no more. So, no signal, and the dollars per euro currency pair remains in bear mode.

    Among holdings:
    • KO continues to show a bull signal, and to raise in price to 57.86, slightly out of profitable territory on my iron condor (p50/-p52.5/-c57.5/c60).
    • The bear signal on SMH has disappeared.
    Otherwise, no new signals.

    Tiger's Cost

    A Sacramento Bee report on a UC Davis study showing the costs  to shareholders of Tiger Woods' marital infidelities demonstrates the folly of trying to say why stock prices move as they do.

    In the study (.pdf, 11pp) Profs. Christopher Knittel and Victor Stango say that companies whose products are endorsed by Woods lost $5 billion to $12 billion in market value, relative to the market as a whole, from the Nov. 27 car accident that unravelled Tiger's cover to the Dec. 11 announcement that the athlete was taking an indefinite leave from golf.

    Their study shows that out of eight companies studied, Woods' core sports-related sponsors -- Electronic Arts (ERTS, maker of the Tiger Woods PGA Tour game console product), Nike (NKE, the shoe people) and Pepsico (PEP, which makes Gatorade) -- lost over 4%.

    The study's methodology makes sense, the researchers chose appropriate companies for their work, so what's not to like?

    The weak link is in the assertion that the losses were due to the Woods Affair. The basis of that assertion is the calendar -- they studied prices at the peak of news reporting of and public interest in the affair -- and corporate connections to the golfer -- the three companies do in fact use Woods to promote their products.

    Had the researchers lifted their eyes from their spreadsheets to the price charts, they would have seen a somewhat different situation.

    ERTS did indeed go down during the study period, but it has been decline since Nov. 12, two weeks before Woods' car accident, and the 20-day moving average has been in a downward trend since Oct. 29.

    NKE had been trading sideways since mid-October and continued to do so for seven days after the car accident. The price declined for two days running beginning Dec. 8, but afterward moved up to the same narrow trading range, where it remains to this day.

    After a one-day downturn, PEP began to rise in price on Oct. 27, the day of the accident, and six days later stood 2.4% above the accident-day close. On Dec. 9, two days before the end of the study period, the price gapped sharply lower at the open after the company lowered the top end of its 2009 revenue and earnings projections.

    The company said nothing about Tiger being the reason for the new guidance, and it would fly in the face of reason to assume that it would be. After all, PEP is a company that takes in $43 billion a year and has a market capitalization of $95 billion. Value of the Woods endorsement to PEP: $20 million.

    NKE has revenue of $19 billion and a market cap of $32 billion. The Woods endorsement is worth $20 to $30 million to the company.

    Likewise, ERTS revenue is $4 billion, its market cap is nearly $6 billion, and the Woods connection is worth $8 million

    In each case the value of the Woods endorsement is an order of magnitude below the company's revenues. No wonder stocks either continued what they were doing or barely budged.

    The Woods' martial problems are high profile, but to make them a cause of stock market loss (or gain) betrays a lack of insight into how markets work.

    The UC Davis profs are far from being alone in this. Every day news outlets peddle stories with some variation of "stocks rise amid consumer optimism" or "stocks down after reports that...". My favorite was in the Black Monday market crash of 1987, when the AP financial wire had a stocks story blaming the stocks crash on bond market action, and a bond story blaming bond market action on the stocks crash.

    Until business journalists are able to read millions of minds during the trading day, no one will be in a position to have any idea as to why shares trade as they do.

    So if someone tries to tell you why the market is up or down or neither, remember that the reason they give t'ain't necessarily so.  And, as you and I as traders well know, the reason is irrelevant. Stocks will move for whatever reason, and our job is to capture a part of that move in our quickly changing portfolios as a way to capture profit.

    Tiger Woods' standing with those companies is much like that of any employee who is laid off, or retires, or for whatever reason becomes less valuable.

    He or she might be missed for awhile. There might  even be a need to adjust workplace procedures to account for the loss.

    But ultimately, when a capitalist enterprise decides to throw a worker away, when a worker decides that enough is enough, when the fickleness of public sentiment transforms a good guy into an evil dude, no one -- absolutely no one -- is irreplaceable.

    The enterprise goes tick-tocking along, creating value for its executive and shareholders. No decent management bets the farm on something as fleeting as celebrity and fame.

    So, breathe a sigh a relief, Mr. Woods. You may be facing troubles over a number of things, but when it comes to stock market value, you're off the hook.

    12/29 Morningline

    A new pps bull signal in the making on the EUR/USD currency pair, but no corresponding signal on the USD/JPY pair.

    KO, my iron condor, also shows a potential new bull signal and has broken above its trading range of the past six days. It is trading at the top of its profitability range (at expiry).

    SMH -- I hold a bull put spread on this semiconductors etf -- shows a potential bear signal but remains so far within its trading range of the past four days.

    A pps signal becomes valid only if it is still in place a the end of the trading period, in this case, the day, since I'm working with daily charts.

    Speaking of days...

    Three more trading days left in 2009.

    Strange to think that a year ago volatility on the S&P 500 (the VIX) was in  the mid-40s and preparing to leap up another 20% to the mid-50s.

    Last week, the VIX dropped into the teens, and yesterday's "gap up" still kept the indicator below 20.

    The VIX is described as a "fear index"; what it measures is volatility. The greater the volatility, the greater the uncertainty over the future course of the market.

    With volatility below 20 in an up market, it's clear that traders have put the unpleasantness of last autumns near-total collapse of the financial system behind them. Ah, happy days. They're here again.

    To the indicators...

    • Blue chips (SPY) open at 113.01, entered bear mode at close on Dec. 8 (at 109.61)
    • Fear index (VIX) 19.87 at the lower end of yesterday's trading range, bear (bullish for stocks), Dec. 22 (20.49)
    • Treasury long bonds (TLT) 89.26, bear, Dec. 21 (91.14)
    • Gold (GLD) 108.50, bear, Dec. 17 (108.00)
    • Oil (USO) 39.06, bull, Dec. 16, (36.74)
    Currency pairs:
    • Dollars per euro (EUR/USD) 1.4378, bear, Dec. 4 (1.49)
    • Yen per dollar (USD/JPY) 91.63, bull, Dec. 15 (89.60)
    Holdings, January expiry, no new signals:
    • KO, iron condor (p50/-p52.5/-c57.5/c60) 57.45, bear, Dec. 16 (58.42)
    • LVS, covered call (-c16) 15.32, bear, Dec. 18 (15.29)
    • SBUX, bull put spread (p22.5/-p24) 23.84, bull, Dec. 18 (23.68)
    • SMH, bull put spread (p27.5/-p29) 27.86, bull, Dec. 21 (27.62)

      Monday, December 28, 2009

      12/28 Watchlist

      No scan for new trades today and through New Year's. There's just not enough liquidity to think of trading during the last week of the year. I'll resume normal ops on Monday, Jan. 4.

      No new signals and little movement since this morning on indicators and currencies.

      Same with holdings, with the exception of SMH, the semi-conductors etf, which opened this morning at 28.14 and has fallen 1.5% to 27.71. It remains well above my stop/loss of 24.85 and very near term support of 27. So I'll be taking no action on this position today.

      12/28 Morningline

      Expect a s-l-o-o-o-w trading week, or non-trading week in my case (unless, of course, it's not, under the impact of events).

      Good read: Paul Krugman in today's New York Times on the decade past, in which "we achieved nothing and learned nothing."

      No new pps signals on the indicators, currencies or holdings. Little movement, except for oil.

      • Blue chips (SPY) open at 112.90, entered bear mode at close on Dec. 8 (at 109.61)
      • Fear index (VIX) 20.29, bear, Dec. 22 (20.49)
      • Treasury long bonds (TLT) 89.46, bear, Dec. 21 (91.14)
      • Gold (GLD) 108.64, bear, Dec. 17 (108.00)
      • Oil (USO) 38.94 on a gap up, bull, Dec. 16, (36.74)
      Currency pairs:
      • Dollars per euro (EUR/USD) 1.4388, bear, Dec. 4 (1.49)
      • Yen per dollar (USD/JPY) 91.42, bull, Dec. 15 (89.60)

      Holdings, January expiry, no new signals:
      • KO, iron condor (p50/-p52.5/-c57.5/c60) 57.41, bear, Dec. 16 (58.42)
      • LVS, covered call (-c16) 15.50, bear, Dec. 18 (15.29)
      • SBUX, bull put spread (p22.5/-p24) 23.63, bull, Dec. 18 (23.68)
      • SMH, bull put spread (p27.5/-p29) 28.14, bull, Dec. 21 (27.62)

        Thursday, December 24, 2009

        The Friendly Trend

        Before putting -30- on the week, here is a pensée on trends, just a small stocking stuffer for Christmas.

        Sit with rapt attention in front of a trading trainer, and some time in the first hour or so you will hear, ""The trend is your friend." If you've sat in as many training session as I have, you will then roll your eyes.

        Yet, the friendly trend underlies much, if not most, technical analysis of the markets. It has a verable pedigree, for it is based on Isaac Newton's statement in 1687 of his First Law of Motion: Something moving keeps moving unless something else intervenes.

        A trend is a series of prices moving more or less in the same direction over a period of time. A trend lasts until it stops, either moderating into a sideways moving or reversing into the opposite trend.

        Every trader's dream is to latch on to a trend early on, and then ride to its extreme, before jumping off just before the trend ends. That tactic is known as trend following, and trader's consider it to be one of the most reliable ways to trade.

        Of course, as the markets lurch up and down from day to day, there's the problem of determining just what the trend is.

        Each day's trading, like each minute's, has a high and a low. A up trend is formed when today's high is higher than yesterday's, and today's low is also higher than yesterday's: Higher highs and lower lows. A down trend is similary: Low lows and lower highs. So a trend can be constructed based on only two period's of trading (whether two days or two minutes).

        A moving average is just a way of smoothing out the fluctuations within a trend to get a better view of the direction. Other indicators are just more complicated ways of attaining the same goal.

        A technical trader has no idea why a trend began, nor why it ended. The trend simply is what it is, and good business means trading the trend according to its isness.

        12/24 Watchlist

        If the markets are sometimes filled with storm and fury, today must count as the smallest of tempests in the tiniests of teapots.

        No new signals and little change from this morning among indicators, currencies and holdings.

        Merry Christmas, everyone.

        12/24 Morningline

        And we're off, on the last trading day before Christmas. The markets close three hours early today (1 p.m. Eastern, 10 a.m. Pacific).

        No pps signals on the indicators, currencies or holdings.

        • Blue chips (SPY) opens at 112.19, entered bear mode at close on Dec. 8 (at 109.61)
        • Fear index (VIX) 19.54, bull, Dec. 17 (22.51); a VIX bull signal is bearish for the markets
        • Treasury long bonds (TLT) 90.33, bull, Dec. 17 (93.19)
        • Gold (GLD) 107.90 on a 1.3% gap up, bear, Dec. 17 (108.00)
        • Oil (USO) 37.86, bull, Dec. 16, (36.74)

        Currency pairs:
        • Dollars per euro (EUR/USD) 1.4337, bear, Dec. 4 (1.49)
        • Yen per dollar (USD/JPY) 91.61, bear, Dec. 9 (87.86); sort of a faux bear, eh?

        Holdings, January expiry
        • KO, iron condor (p50/-p52.5/-c57.5/c60) 57.48, bull, Dec. 1 (58.08); right at the upper limit of a profitable expiry
        • LVS, covered call (-c16) 15.73, bull, Dec. 14 (16.31); a faux bull, but my basis is 14.90
        • SBUX, bull put spread (p22.5/-p24) 23.76 and falling within the yesterday's trading range, bull, Dec. 18 (23.68)
        • SMH, bull put spread (p27.5/-p29) 27.74, bull, Dec. 21 (27.62); trading right at three-day resistance

        Wednesday, December 23, 2009

        12/23 Watchlist

        This is the kind of day when I want to break into a stirring rendition of "I've Got Plenty of Nothin'". (Must add, nothin' is in no way plenty for me.)

        No new signals at close on the indicators, currencies or holdings.

        The signals identified on etfs in yesterday's Watchlist remain in force. USO and XLE have confirmed their bull signals with nice price rises.

        Also, no new pps signals on the highest-volume etfs.

        I plan no trades today. Wednesday, the day before Christmas, is a short day of trading. The markets open at 9:30 a.m. and close at 1 p.m. Eastern (6:30 a.m. to 10 a.m. Pacific). Afterward, the next trading day will be Monday, first day of a four day week in the usually very low volume last week of the year.

        12/23 Morningline

        No new pps signals this morning. Nothing is going much of anywhere. No surprise, 'tis the day before the day before Christmas (and in the trade hall, not a option was stirring, not even a call). Barring catastrophe, it will be a low volume day.

        • Blue chips (SPY) open at 112, entered bear mode at close on Dec. 8 (at 109.61)
        • Fear index (VIX) 19.54, bull, Dec. 17 (22.51); levels of fearlessness unseen since the summer of 2008, before the financial collapse.
        • Treasury long bonds (TLT) 90.96, bear, Dec. 21 (91.14)
        • Gold (GLD) 106.65, bear, Dec. 17 (108.00)
        • Oil (USO) 37.18 on a 1.7% upward gap, bull, Dec. 16, (36.74)
        Currency pairs:
        • Dollars per euro (EUR/USD) 1.4248 and rising, bear, Dec. 4 (1.49)
        • Yen per dollar (USD/JPY) 91.82 and falling within the range of yesterday's trading, bull, Dec. 15 (89.60)

        Holdings, January expiry, no new signals:
        • KO, iron condor (p50/-p52.5/-c57.5/c60) 57.20, bull, Dec. 1 (58.08)
        • LVS, covered call (-c16) 15.42, bull, Dec. 14 (16.31)
        • SBUX, bull put spread (p22.5/-p24) 37.18, bull, Dec. 18 (23.68)
        • SMH, bull put spread (p27.5/-p29) 27.69 and rising within yesterday's trading range, bull, Dec. 21 (27.62)
        Nothing to add to the etfs on yesterday's Watchlist. The signals are still in place, in a weak and unconvincing way.
          I'll do today's Watchlist from an Amtrak bus speeding south from Portland on Interstate 5. If for some reason the Watchlist doesn't show, it will mean that I had communications problems.

            Tuesday, December 22, 2009

            12/22 Watchlist

            No new signals on the indicators, currencies or holdings. Every issue's volume is low.

            The pre-close scan, through the end of December, will cover only high-volume etfs (5 million shares and higher in volume), excluding those that are contrarian and those that multiply the underlying. The list will be smaller than usual because of lower volume in the holiday week.

            Just for the exercise, today I'll be looking at several technical tools: The Persons proprietary signal (pps), which is my usual tool of choice, but also the price piercing the 20-day moving average (ma20), piercing the 200-day moving average (ma200), 20-day and 200-day moving average crossovers (ma cross), money-flow index (mfi) moves into overbought or oversold territory, the moving average convergence-divergence (macd) and the slow stocastic (sto).

            • XLF (financials), macd and ma20, bull
            • EWJ (Japan markets), macd confirming sto, bear
            • SLV (silver), mfi oversold, bull
            • XLU (utilities), macd confirming sto, bear
            • USO (oil), macd, bull
            • XLE (energy), sto confirming macd, bull
            • DIA (Dow Jones Industrial Average), ma20, bull
            So, out of 30 etfs, no pps signals, a couple of 20-day moving average piercings, a sto, an mfi and five macd signals.

            The macd is one of the more sensitive indicators -- this is known. The pps is said by its developer to give earlier valid signals than the others. If that's the case, then today's signals must be whipsaws. I'll continue the multi-track for awhile and we shall see.

            Nothing here I would want to trade.

            12/22 Morningline

            A signal free day. No news is good news?

            No new signals on the indicators:
            • Blue chips (SPY) open at 111.57, within yesterday's trading range, entered bear mode at close on Dec. 8 (at 109.61)
            • Fear index (VIX) 20.39, also within yesterday's range, bull, Dec. 17 (22.51)
            • Treasury long bonds (TLT) 90.80 on a 0.40% gap down, bear, Dec. 21 (91.14)
            • Gold (GLD) 106.79, bear, Dec. 17 (108.00)
            • Oil (USO) 36.25, within yesterday's range, bull, Dec. 16, (36.74)
            Currency pairs, no new signals:
            • Dollars per euro (EUR/USD) 1.4275 and rising, bear, Dec. 4 (1.49)
            • Yen per dollar (USD/JPY) 91.16 and rising, bull, Dec. 15 (89.60)

            Holdings, January expiry, no new signals:
            • KO, iron condor (p50/-p52.5/-c57.5/c60) 57.15 and rising, bull, Dec. 1 (58.08)
            • LVS, covered call (-c16) 15.65 and steady, bull, Dec. 14 (16.31)
            • SBUX, bull put spread (p22.5/-p24) 23.34 and rising but within yesterday's range, bull, Dec. 18 (23.68)
            • SMH, bull put spread (p27.5/-p29) 27.71 at the top of yesterday's range and rising, bull, Dec. 21 (27.62)
            Apropos nothing serious, Investopedia this morning sent around an email with the subject line, "Enhance your trading experience with The Golden Secret". At first glance, I thought it was viagra spam.

            Well, no golden secrets here. Jest plain tradin'.

                  Monday, December 21, 2009

                  Opened SMH bull put spread

                  I've opened a January bull put spread (p27.5/-p29) on SMH, the etf that tracks semiconductor stocks, with the stock trading at 27.56 for a 0.93 credit.

                  The trade is profitable at expiration from about 28.07 upward, and fully profitable at 29.05.

                  The average true range over the past 14 days is 0.52, so profitability is about one up-days trading away, and maximum profit is about 3 up-days trading.

                  From the chart, it's a blue-sky stock. There's no resistance on the upside.

                  There is support at 27.4, and support at 26.9. The 3% stop/loss is 26.74.

                  A stop/loss at triple the average trading range would be 26, or a 6% decline. That level also shows price support.

                  12/21 Watchlist

                  It's Christmas week, and I'll be scanning in holiday mode this week and next: I'll check out the indicators and currencies, and of course watch my holdings like a paranoid hawk.

                  But, for new entries, I shall be scanning only a few high-volume etfs, and most likely won't be opening any new positions. might be opening positions, if they're really compelling, as SMH seems to be (see below).

                  A new bear signal on the fear index (VIX), but oddly not on the blue-chips (SPY) whose volatility the VIX measures. The VIX is trading at 20.33, down 5.3% from the open. The signal comes two days after a bull signal amid a downtrend that began in January.

                  Treasury long bonds (TLT) shows a bear signal, two days after giving a bull signal. TLT is trading at 91.55, down 0.5% from the open.

                  Otherwise, no new signals on the indicators, the currencies or my holdings.

                  High-volume etfs (ignoring shorts and multiples):
                  • QQQQ (the NASDAQ), bull signal in an uptrend that begin in March. The etf has given three signal reversals in six trading days.
                  • XLF (financials), bull signal, strong uptrend began in March, and a less convincing retracement downward in October.
                  • UYG (financials), bull signal, uptrend began in March, retracement in October.
                  • XRT (retail), bull signal in a sideways trend since October, reversing Friday's bull signal.
                  • SMH (semiconductors), bull signal on a gap up, in an uptrend since March and a sideways trend since the beginning of December.
                  The SMH signal is the most convincing of the lot.

                  Thinking about the X trade

                  Bad trade. Started bad. Stayed that way. Not how I wanted to celebrate the Solstice.

                  The loss in closing my position in X was just wrong on several levels. Folly, I say. Folly!

                  I entered  the trade in a bearish position on Dec. 7, the day after a bear signal. From the standpoint of the technical analysis, it was a rational decision.

                  On Dec. 9 the stock reversed and gave a bull signal on a strong rise. Error #1 was not selling at market close on Dec. 9. My decision not to exit was based on resistance levels, a perfectly valid way of making decisions. Also, it was a net short option position, meaning that I made money every day that I held it. So, there's an added incentive not to be hair-trigger about exiting.

                  However, at the Dec. 9 close the stock was 4.4% away from my entry point in the wrong direction.

                  The rule of thumb on stop/losses is generally about 3% from entry. Any trader who goes further than that is verging on the nervy. Or possibly the clueless.

                  Whichever, I continued to hold the position expecting a reversal at resistance. There was a pause last week that seemed promising, and then today's breakout above  the pause level shattered all illusions.

                  Some good rules for exiting:
                  • Close if the indicator you used for entry gives a contrary signal. In this trade, that would have meant a 4.3% loss on the stock. That would have gotten me out at the close on Dec. 9. Not wonderful, but only a third of what I lost by holding.
                  • Close if the stock moves 3% or more from entry in a direction contrary to the direction of the position. That would have closed the position earlier in the day on Dec. 9.
                  • Take the average true range -- an average of the price movements for past past (usually) 14 days -- multiply the atr by some factor, like 3 perhaps, and then make that the maximum that you'll let the price move away in the wrong direction from your entry price. If you multiply by 3, you can think of it as allowing no more than 3 days trading in that direction.
                  That's it. Lessons learned, and live to fight another day.

                  Closed X -11.3% (Options -30.6%)

                  I've closed my bear call spread (-c40/c41) on X at 50.47 on the stock, for a 0.98 debit on the options.

                  The stock had moved 11.3% against my direction (a 12.8% rise), and the loss on the options was 30.6%.

                  12/21 Morningline

                  It's Christmas week, which means somewhat lower trading volumes and a greater likelihood of false signals. On Thursday, the market closes early -- 1 p.m. Eastern, 10 a.m. Pacific. Next week is New Year's week, which will be even slower.
                  I'll be monitoring the indicators and my positions this week and next, but I'll be doing very little in the way of scanning for new positions. I'll be looking mainly at the high-volume etfs.

                  The indicators:
                  • Blue chips (SPY) opens at 110.76 and rising, entered bear mode at close on Dec. 8 (at 109.61)
                    • Fear index (VIX) 21.46 and falling, bull, Dec. 17 (22.51); a VIX bull signal is bearish for the markets
                  • Treasury long bonds (TLT) 92.06 on a 0.8% gap down, bull, Dec. 17 (93.19)
                  • Gold (GLD) 109.17 and going nowhere, bear, Dec. 17 (108.00)
                  • Oil (USO) 36.95 and going nowhere, bull, Dec. 16, (36.74)
                  Currency pairs:
                  • Dollars per euro (EUR/USD) 1.4307 and rising, bear, Dec. 4 (1.49)
                  • Yen per dollar (USD/JPY) 90.26 and rising, bear, Dec. 9 (87.86)
                  Oddly, the dollar is weakening with respect to the Euro and strengthening with respect to the yen.
                    Holdings, January expiry
                    • KO, iron condor (p50/-p52.5/-c57.5/c60) 57.02 and unchanging, bull, Dec. 1 (58.08)
                    • LVS, covered call (-c16) 15.42 and unchanging, bull, Dec. 14 (16.31)
                    • SBUX, bull put spread (p22.5/-p24) 23.69 and falling, bull, Dec. 18 (23.68)
                    • X, bear call spread (-c40/c41) 50.58 on a 2.7% gap up, bull, Dec. 9 (46.74)
                    The X position needs to be closed, as it has broken out of resistance contrary to the direction of the trade.

                    (Signaling by Person's proprietary signal.)

                    Friday, December 18, 2009

                    Thinking About Technical Indicators

                    I use technical indicators as a starting point for every trade. They're a valuable tool.

                    These days I'm using an indicator called Person's Proprietary Signal. It's propietrary; I have no idea how it's calculated. 
                    But I've also used Bollinger Bands combined with the Money Flow Index or the Relative Strength Index, and I've used those indexes without the bands. I've used Moving Average Crossovers. I've used the MACD and the Stochastic indicators, both separately and in tandem, and with moving averages. You name it; I've used it.

                    There are a couple things I've learned about technical indicators.

                    One is that they don't always work. Sometimes, they'll give a bull signal (prices are going up) the day before prices go down. Or a bear signal (prices are going down) the day before prices go up. 

                    At other times, a bull signal will mark the start of a price increase of epic proportions. A bear signal will begin a price collapse that leaves a company's stock in smoking ruins. 

                    And there is no way for me, the trader, to determine at the time of the signal whether its a good one or a bad one. 

                    The other is that signals are prone to whipsaws. A whipsaw is when you get a bull signal one day, a bear signal two days later, and then another bull signal the day after that. And for all the drama, the price really doesn't do much. 

                    People who say there are bulls and bear in the markets overlook a third important group: confused puppies, who don't know whether they're going up or down, or just staggering across the living room carpet. Technical indicators don't deal with confused puppies very well.

                    Also, all technical indicators have this in common: They take the past and aggregate it in some way in order to produce a signal. A technical indicator is a simplifier. It attempts to somehow smooth the frenetic ups and downs of the trading day, as prices change by the second, and from that simplification to extrapolate future behavior of prices.

                    On the face of it, that's a fairly extraordinary thing: How does simplifying the past help me understand the future? Rather, it seems more sensible to think that embracing the past in all of its complexity will make the future clear.

                    Physicists, after all, have gained greater understanding of the universe by dealing with smaller and smaller chunks of energy and matter. Doctors cure disease by understanding the chemistry within each cell, and biologists understand human behavior by focusing on the microscopic firings of nerves in the brain.

                    In some ways, technicals indicators seem to be artists masquerading as scientists. They say, "We're precise", but in practice, they're not.

                    For me, they have a somewhat musty 19th century feel to them. When I use them, I  feel as though I'm time traveling, back to the days of Sherlock Holmes, that great extrapolator from limited facts, with his pipe and magnifying glass intoning, "Elementary, my dear Watson".

                    12/18 Wrap

                    I've finished trading for the day.

                    Next week is Christmas week, but what a busy week it is for economic reports: gross domestic product on Tuesday, personal income on Wednesday, durable goods on Thursday.

                    The stock exchanges close early on Thursday, at 1 p.m. Eastern (10 a.m. Pacific) for Christmas Eve.

                    Enjoy the weekend!

                    Opened SBUX bull put spread

                    I've opened a bull put spread (p22.5/-p24) on SBUX, with the stock at 23.68 for 0.62 credit, based on a bull signal in line with the longer price trend.

                    12/18 Watchlist

                    No new signals on the indicators or the currency pairs since today's Morningline.

                    Among my holdings, the LVS January covered call  (-c16) continues to show a bear signal, with a small decline in price. Trading remains within yesterday's range.

                    A bit of a change in today's scan of high-volume stocks. Rather than listing all of the signals and then rejecting those that don't accord with my trend-following style, I'll list only those issues where the signal and the trend match my method. A shorter list.

                    High-volume stocks of $20 or greater:
                    • SBUX, bull signal on a 6.5% price rise, within an uptrend
                    The SBUX rise keeps above all prior highs. It's a blue-sky stock, with no upside price resistance. The uptrend has been in force since November 2008. An attractive bull play.

                    Next, a scan for possible covered calls. We're 28 days from expiration of the January options, so it's prime time for these instruments.
                    • GE, trading in a narrow range since November, currently in bear mode, stock 15.70, strike 16, premium 0.34; GE earnings are on Jan. 18, at the time of expiration.
                    • DELL, narrow range since September, bull mode, stock 13.76, strike 14, premium 0.37
                    It's hard to find decent covered call trades; premiums are low because volatility is low.

                    12/18 Morningline

                    Today is a quadruple witching day on the markets, when stock index futures, stock index options, stock options and single stock futures all expire. Sometimes, this produces a bit of craziness in the markets. Although today, with volatility so low, maybe not.
                    The indicators:

                    • Blue chips (SPY) opens at 110.20 and stalls, entered bear mode at close on Dec. 8 (at 109.61)
                    • Fear index (VIX) 21.84, bull, Dec. 17 (22.51); a VIX bull signal is bearish for the markets
                    • Treasury long bonds (TLT) 93.20, bull, Dec. 17 (93.19)
                    • Gold (GLD) 108, bear, Dec. 17 (108.00)
                    • Oil (USO) 36.59, bull, Dec. 16, (36.74)
                    Currency pairs:
                    • Dollars per euro (EUR/USD) 1.4336, bear, Dec. 4 (1.49)
                    • Yen per dollar (USD/JPY) 89.95, bear, Dec. 9 (87.86)

                    Holdings, December expiry:
                    • UNG, covered call (-c9) 10.71, bull, Dec. 7 (9.22)

                    Holdings, January expiry
                    • KO, iron condor (p50/-p52.5/-c57.5/c60) 57.26, bull, Dec. 1 (58.08)
                    • LVS, covered call (-c16) 15.59, bull, Dec. 14 (16.31)
                    • X, bear call spread (-c40/c41) 49.42, bull, Dec. 9 (46.74)
                    UNG expires today. The call will be exercised, meaning that I'll be obligated to sell my shares for the $9 strike price and in return get to keep the premium I got when I sold the call.  The basis of the stock is 9.12, the premium was 0.51, so my net profit will be 0.39

                    LVS is showing a new bear signal on the fifth day after it showed a bull signal. In neither case was there confirming price action.

                      Closed AET +3.0% (options +14.6%)

                      I've closed my AET bull put spread (p31/-p32) on a price reversal, at 32.65 on the stock and for a 0.41 debit on the option.

                      That's a gain of 3% on the stock and a profit of 14.6% on the options.

                      Thursday, December 17, 2009

                      Closed VALE -5.9% (-27.4% on the options)

                      I've closed my bull call spread (p30/-p31) on VALE at 27.49 on the stock for a 0.85 debit on the options.

                      The stock was down by 5.9%, and the loss on the options was 27.4%, on a position lasting three calendar days.

                      Closed HPQ +2.7% (+48.5% on the options)

                      I've closed my HPQ bull put spread (p49/-p50) at 50.61 on the stock, for a debit of 0.33 on the options.

                      That's a 2.7% gain on the stock price, and a 48.5% profit on the options, in a trade lasting 10 calendar days.

                      12/17 Watchlist

                      A new bull signal on Treasury long bonds (TLT), and a bear signal on gold (GLD). Otherwise, nothing to add to this morning's discussion of the indicators.

                      No new signals on the currency pairs (EUR/USD and USD/JPY)

                      Among holdings:

                      Three January bull positons -- AET, HPQ, VALE -- have pulled back from peaks. I'm thinking of closing the positions.

                      LVS, a January covered call, is showing a bear signal, and prices remain in a sideways range.

                      KO, a January iron condor, has moved back in to max profit territory.

                      UNG, my December covered call, is trading well above 10. The call is a 9 strike, so the position will be exercised by whoever bought the call.

                      High-volume stocks and etfs priced $20 and above:
                      • QQQQ, bear signal, uptrend
                      • EEM, bear with a downward gap, uptrend
                      • JPM, bear, downtrend, but already at resistance
                      • MSFT, bear, uptrend
                      • MJN, bear,sideways trend, on the fourth day following a bull signal; confused puppy mode
                      • FCX, bear, amid a sharp pullback following an uptrend, the day following a bull signal; drunken sailor mode
                      • PG, bear, uptrend, on the fourth day following a bull signal (no more metaphors)
                      • FDX, bear, uptrend, on a gap down following earnings
                      • VWO, bear on a gap down, uptrend
                      • MOS, bear, sideways with some deep fluctuations
                      • DTV, bear, uptrend
                      • IVV, bear, uptrend
                      • XLI, bear, uptrend
                      • XLV, bear, uptrend
                      • VOD, bear, uptrend
                      • AXP, bear, uptrend
                      • GPS, bear (but no gap), trend change (maybe) from up to down
                      • DIA, bear, uptrend
                      • COF, bear, sideways following a strong uptrend
                      So, all in all, a fairly broad switch into bear mode. A lot of the stocks, not just those noted above, showed whipsaws from bull to bear the last few days. With the holiday trading week coming up, closing questionable positions is the prudent course.

                      JPM is the only trend following trade  in the batch, and since it is already at resistance, I don't find it to be compelling.

                      No covered call scan today.

                      Leading Indicators Up

                      The index of leading economic indicators is up 0.9 percent in November, the 8th month in a row.

                      In terms of short-term trading, the way I do it, it means little. It does, however, give a bit more credibility to bull signals and a takes a bit of credibility away from bear signals.

                      For me, this sort of indicator is more of a mood setter, like a lava lamp, rather than an actionable piece of data.

                      12/17 Morningline

                      The November leading economic indicators report will be out shortly.
                      This is my favorite economic indicator, because it's forward looking and so matches the mindset of the markets. October was the seventh month to show an increase.

                      Meanwhile, to the indicators:

                      • Blue chips (SPY) opens at 110.72 on a gap downward, entered bear mode at close on Dec. 8 (at 109.61)
                      • Fear index (VIX) gaps upward 21.79, bear, Dec. 11 (21.59)
                      • Treasury long bonds (TLT) 92.5 on an upward gap, bear, Dec. 1 (95.25)
                      • Gold (GLD) 109.47 gaps downward, bear, Dec. 4 (113.75)
                      • Oil (USO) 36.59 no gap, bear, Dec. 4 (38.33)
                      Mainly, it's a gappish sort of day.

                      Currency pairs:
                      • Dollars per euro (EUR/USD) 1.45, bear, Dec. 4 (1.49)
                      • Yen per dollar (USD/JPY) 89,76, bear, Dec. 9 (87.86)

                      Holdings, December expiry:
                      • UNG, covered call (-c9) 10.20, bull, Dec. 7 (9.22)

                      Holdings, January expiry
                      • AET, bull put spread (p31/-p32) 33.56, bull, Dec. 8 (30.47)
                      • HPQ, bull put spread (p49/-p50) 50.94, bull, Dec. 9 (49.95)
                      • KO, iron condor (p50/-p52.5/-c57.5/c60) 58.26 and falling, bull, Dec. 1 (58.08)
                      • LVS, covered call (-c16) 15.55, bull, Dec. 14 (16.31)
                      • X, bear call spread (-c40/c41) 49.26, bull, Dec. 9 (46.74)
                      • VALE, bull put spread (p30/-p31) 28.27 on a gap down, bull, Dec. 14 (29.20) 
                      VALE is showing a new bear signal on a gap down but with a rising price since the open. It will bear watching.

                      KO is dropping back into profitable territory on my iron condor.

                      (Signals derived using Person's Proprietary Signal applied to daily charts.)

                      Wednesday, December 16, 2009

                      Opened LVS Covered Call

                      I've bought shares of LVS and sold a call, the 16 strike expring in January (-c16), covered by the shares.

                      The shares cleared for 15.77, and the call sold for 0.94. So my basis is 14.83.

                      12/16 Watchlist

                      Today it is 30 days before expiration of the January options, which means we're into prime time for covered calls. I'll be taking at look today and in subsequent Watchlists at high-volume stocks priced below $20 showing signals that might make them good covered call candidates. See the end of this posting.

                      A covered call stock needs to meet these criteria:
                      • Slightly bullish to neutral prospects. I.e., I don't want the shares to come crashing down, but I also don't want them to have huge rise.
                      • Price sufficiently low so that I can afford 100 shares. Calls come in 100-share units, so there's no way to sell a call against fewer than 100 shares.
                      • Volume sufficient to provide liquidity. Basically, the higher the better, but not below 1 million shares.

                      USO is showing a bull signal on a 2.6 percent rise followed by a partial pullback. The trend has been sideways since June. Otherwise, no new indicator signals.

                      No new signals from the currency pairs or my holdings.

                      High-volume stocks and etfs priced at 20 or greater:
                      • CVS, bear signal, sideways trend since a huge gap down in November
                      • KR, bull, sideways since a huge gap down on Dec. 8
                      • BRCM, bull on a 4% rise, up since November
                      • EBAY, bull, down since September
                      • CIT, bear, unknown trend after five trading days since shares resumed trading
                      • ESRX, bear on a 4.7% fall, up since March; shares are trading where they were on Nov. 30, so it's not as apocalypic as it might sound.
                      • MHS, bear on 4.6% fall, up since March
                      • BBD, bear, up since March
                      • BA, bear, up since March (with some fairly deep pullbacks)
                      ESRX and MHS fell on news reports that healthcare would face increased regulation under Obama's policies. Duh.

                      The bear signals on those two issues are counter-trend, but I shall look hard at them at the next bull signal.

                      BRCM's with-the-trend bull signal pushes prices to upside resistance, the second test of those levels in the past four days. A possible trade if it breaks above 32.

                      High-volume shares and etfs below $20 that are possible covered-call candidates:
                      • GE, 15.71, bear mode, sideways since October,
                      • EWJ, 10.03, bull, sideways since September (with deep pullbacks)
                      • EWT, 12.40, bear, sideways since August
                      • LVS, 15.88, bull yesterday, sideways since July
                      All of these have 200-day moving averages that are turning up. GE has a 0.39 premium on the January 16 strike calls, and LVS a 1.09 premium on the 16-strike. Of the two, I would go for the premium and sell a covered call against LVS.

                          Thinking About the UNG Covered Call

                          My position on UNG, the natural gas etf, is about to expire after the end of trading on Friday. I hold shares of the stock with a base price of 9.12, and against those I sold calls with a strike price of 9 (-c9).

                          The UNG trade is a fine example of why covered calls are such wonderful trades, and why they always, somehow, create a feeling of unhappiness, like someone picked your pocket when you weren't looking.

                          (When the Buddha said, "Everything is unsatisfactory -- dukkha," I'll bet he was thinking of covered calls.)

                          Properly set up, with the price basis and strike price closely aligned, a covered call will always be safely profitable. And yet, there's always a sense of danger and loss. For if the share prices go up, the covered call soaks up profits that would otherwise go to the trader. If share prices go down, the trader can nervously comptemplate how close he or she sailed to the edge of disaster.

                          When I sell a call against shares of stock, I'm receiving money and in return assuming an obligation to sell those shares at the strike price, no matter what the price of the stock does.

                          UNG is now trading at 10.09, the strike price of the calls is 9.00, and my basis on the shares is 9.12. I sold the covered calls for 0.51, and that money is safely stashed in my pocket.

                          If I honor my obligation now (and I don't choose the timing, the person who bought my calls does), then I am giving up my stock for 9.00, an actual loss of 0.12 (9.12 - 9.00). Moreover, if I hadn't sold the covered call, then I could sell those shares of stock for a gain of 0.97 per share (10.09 - 9.12).

                          On the one hand, I have a profit of 0.51 less my 0.12 loss on the shares, or 0.39. On the other hand, I could've made 2-1/2 times that profit had I not sold the call.

                          So, was UNG a bad trade? I would argue not at all.

                          First off, my profit is 4.3 percent on a trade that lasted one month. That's 52 percent a year. I'll take that sort of return any time.

                          True, by doing the covered call, I lost out on 10.6 percent profit, or 127 percent annualized. But that analysis is Monday morning quarterbacking based on a 20/20 hindsight, with a crystal ball tossed into the bargain as well. Based on what I knew at the time, the covered call made perfect sense.

                          When I bought the stock on Nov. 17, the signals pointed toward a bull period, an increase in price. Instead, as sometimes happens, the stock turned south the next day and declined. Technical indicators don't always work.

                          I could have sold the stock for a loss, but I'm always reluctant to lose if I can find a winning alternative. So I sold the covered calls on Nov. 18, knowing that I would have a 0.39 profit no matter what the stock did.

                          The stock price remained below my 9.12 basis until Nov. 25, when it bumped up to  above 9.60 on a bull signal, and then on Dec. 1 dropped below my basis on a bear signal.

                          On Dec. 7 the price again rose above my basis on a bull signal, paused for two days, and then continued to rise, opening above near-term resistance on Dec. 11 (although closing below it).

                          Yesterday, Dec. 15, was the first day that the stock had an up day that was above near-term resistance.

                          The covered call made sense for most of the month. UNG hit a low on Dec. 3 of 8.50 after moving below near-term support. Had I not sold the covered call, I would have been looking to sell at that point for 0.62 loss. There was nothing to suggest that the stock price would turn up again.

                          I'm happy with the trade. It would have been better if the strike price had been at or slightly below my basis, so that I would have no loss or even a small profit on the shares themselves. But the overall position is profitable, and profit is why I do this.

                          There are many books on covered calls, which are a basic options strategy open to anyone, even inexperienced traders.

                          One of my favorites is Covered Calls and Naked Puts: Create Your Own Stock Options Money Tree, by Ronald Groenke.


                          Ronald Groenke's publisher has let us know that his "Money Tree" book on covered calls and naked puts is out of print. His latest is Show Me the Money: Covered Calls & Naked Puts for a Monthly Cash Income 

                          12/16 Morningline

                          The Consumer Price Index rose 0.4 percent, a fraction of the Producer Price Index's 1.8 percent rise announced on Tuesday. So, we can all refrain from a full-scale inflation panic for at least another month.
                          The Federal Open Market Committee will make their statement on rates and the economy at 2:15 p.m. Eastern (11:15 a.m. Pacific).

                          December options expire on Friday, which is a Quadruple Witching day,  sort of a speculators' Halloween. Be sure to lay on a supply of candy for any frazzled traders that come trick-or-treating at your door on Friday.

                          No new signals on the things I look at.

                          The indicators:

                          • Blue chips (SPY) opens the day at 111.8, entered bear mode at close on Dec. 14 (at 111.87), barely changed from yesterday
                          • Fear index (VIX), 21.5 , bear, Dec. 11 (21.59), falling
                          • Treasury long bonds (TLT), 91.93, bear, Dec. 1 (95.25), at the top of yesterday's trading range.
                          • Gold (GLD) 110.83, bear, Dec. 4 (113.75), rising
                          • Oil (USO), 36.08 , bear, Dec. 4 (38.33), rising

                          Currency pairs:
                          • Dollars per euro (EUR/USD) 1.45, bear, Dec. 4 (1.49), rising and within yesterday's trading range
                          • Yen per dollar (USD/JPY) 89.6, bear, Dec. 9 (87.86), at the top of yesterday's range.
                          Holdings, December expiry:

                          • UNG covered call (-c9), 10.22, bull, Dec. 7 (9.22), at the top of yesterday's range
                          Holdings, January expiry

                          • AET bull put spread (p31/-p32), 33.54, bull, Dec. 8 (30.47), slight gap up and rising
                          • HPQ bull put spread (p49/-p50), 50.9, bull, Dec. 9 (49.95), at the top of yesterday's range
                          • KO iron condor (p50/-p52.5/-c57.5/c60), 58.95, bull, Dec. 1 (58.08), within yesterday's range (and 1.20 above max profit at expiry)
                          • X bear call spread (-c40/c41), 48.95, bull, Dec. 9 (46.74), at the top of yesterday's range
                          • VALE bull put spread (p30/-p31), 29.04, bull, Dec. 14 (29.20), within yesterday's range
                          (Signals derived using Person's Proprietary Signal applied to daily charts.)

                          Tuesday, December 15, 2009

                          12/15 Wrap

                          No trades today.

                          A busy day for economic news on Wednesday, with the Consumer Price Index and Housing Starts at 8:30 a.m. Eastern (5:30 a.m. Pacific), and the Federal Open Market Committee Announcement at 2:125 p.m. Eastern (11:15 a.m. Pacific).

                          12/15 Watchlist

                          Indicators, currency pairs and holdings are showing no new signals since the Morningline.
                          Mobile phone companies showed bear signals after reports that Google plans to enter the cellphone hardware and service business. Among the high-volume stocks and etfs:
                          • BBY, bear signal on a gap down following earnings guidance; the stock has shown three signals in five days. The stock has been on an uptrend since June, so a bull signal after a pullback would be playable.
                          • VZ, bear, uptrend since October
                          • T, bear, uptrend since July
                          • GILD, bear, pretty much sideways since February
                          • XLE, bull, downtrend since October
                          • BK, bear, sideways, mainly, all year
                          • FLR, bull, downtrend since July
                          The number of new signals is something of an indicator. Compared to yesterday, today is a yawner.

                          BBY, VZ and T  might be playable on the next bull signal, if accompanied by price/volume confirmation, but the bear signal is counter-trend, something I'm avoiding these days.

                          The rest are either counter-trend or stocks going nowhere, and so don't pique my interest.

                          Looking more closely at my holdings:

                          UNG, my remaining December option, just keeps rising. In hindsight, better to have held the shares rather than hedging with a covered call (-c9). Go figure.  Even so, I'll profit from the covered call when the shares are drawn away from me after the option's last trading day, Friday.

                          At current prices, it would cost net 0.14 to exit UNG and the covered call, against a net 0.39 profit if I wait until expiry.

                          The bull put spreads:

                          • AET (p31/-p32)  is bumping up against resistance set last January. I'm holding for now but will close at the first sign of a price pullback. 
                          • HPQ (p49/-p50) has hit resistance set in November, and I'll be fairly hair-trigger about closing that position as well.
                          • VALE (p30/-p31) is trading within the range set yesterday, when I opened the position
                          X, a bear call spread (c41/-c40) is toying with upside resistance set in September. If it bumps through then I'll close for a loss. The stock flipped into bull mode on the fourth day after I opened the position.

                          KO, an iron condor (p50/-p52.5/-c57.5/c60), sits at a resistance level set in May 2008 and remains above max profitability, proving yet again that an iron condor has double the risk of beaking your heart. It can be unprofitable on both the upside and the downside.

                            12/15 Morningline

                            A new bull signal is showing this morning on USD/JPY, the third signal in nine trading days. The price, now 89.94, remains below resistance at about 90.20 and is trading within Friday's range.

                            Treasury long bonds (TLT) gapped down in price after the Bureau of Labor Statistics said the producer price index increased by 1.8%. The TLT decline prices in a likelihood that the Fed will increase interest rates sooner rather than later to stave off inflation.  (Rule of thumb: Higher interest rates, lower bond prices.)

                            The Fed is meeting today and will make an announcement on Wednesday, at 2:15 p.m. Eastern (11:15 a.m. Pacific).

                            • Blue chips (SPY) opens at 111.46, entered bull mode at 111.87 on Dec. 14, but with a suspicious price bar that leads me to believe that it's a spurious signal. Prior, SPY entered bear mode at close on Dec. 8 (at 109.61)
                            • Fear index (VIX) , 21.09, bear, Dec. 11 (21.59)
                            • Treasury long bonds (TLT) 91.57, bear, Dec. 1 (95.25)
                            • Gold (GLD) , 109.94, bear, Dec. 4 (113.75)
                            • Oil (USO), 35.62, bear, Dec. 4 (38.33)

                            Currency pairs:
                            • Dollars per euro (EUR/USD) , 1.47, bear, Dec. 4 (1.49)
                            • Yen per dollar (USD/JPY) 88.62, bear, Dec. 9 (87.86), but with a new bull signal showing this morning, confirmed by an intra-day price rise.

                            Holdings, December expiry:
                            • UNG, covered call (-c9) , 9.99, bull, Dec. 7 (9.22)

                            Holdings, January expiry
                            • AET, bull put spread (p31/-p32) 32.13, bull, Dec. 8 (30.47)
                            • HPQ, bull put spread (p49/-p50) 50.52, bull, Dec. 9 (49.95)
                            • KO, iron condor (p50/-p52.5/-c57.5/c60) 59.15, bull, Dec. 1 (58.08)
                            • VALE, bull put spread (p30/-p31), 28.89, bull, Dec. 14 (29.20)
                            • X, bear call spread (-c40/c41) 48.18, bull, Dec. 9 (46.74)
                            (Signals derived using Person's Proprietary Signal applied to daily charts.)

                              Monday, December 14, 2009

                              Opened VALE at 29.21

                              I've opened a January bull put spread (p30/-p31) on VALE at 29.21 for 0.64 credit. It his max expiration profit at 31 and so must bump through resistance at 29.93.

                              12/14 Watchlist

                              Among the indicators, blue chips (SPY) continues to show a bull signal, but I'm not sure that I trust it. The chart showed a drop at the open from 111.87 down to  105.48, and then a quick recovery back up to slightly below 112. I won't act on the signal until I see some price confirmation.
                              Otherwise, there are no new indicator or currency signals.

                              New signals among high-volume stocks and etfs are big on energy, emerging markets, and additions to the S&P 500 index. I find VALE to be the most interesting, because it has the clearest trend, and QQQQ, because of its position as one of the top two etfs:
                              • VALE, bull, uptrend since March, pause since mid-November. Wonderful trend. 
                              • XTO, bull on a sharp gap upward on news. Exxon-Mobil announced it would take over XTO Energy.
                              • QQQQ, bull, uptrend since March, sideways since late November.
                              • EEM, bull, uptrend since March, sideways since mid-November.
                              • CHK, bull on a gap up, downtrend since early November
                              • MSFT, bull, uptrend since March, sideways since late November
                              •  OSK, bear on a decline from 41.42 down to 33, on news about an Army contract
                              • WMT, bear, up since early october, sideways since early December. Confused puppy mode: It's the third signal in seven trading days.
                              • XLK, bull, uptrend since March. The fifth signal in 15 days; also a confused pup.
                              • IYR, bull, uptrend since March, sideways (with some good volatility) since early September.
                              • MJN, bull, uptrend since April, sideways since August, and a fair dinkum drop from late September. It was added to the S&P500.
                              • PM, bull, up since January, sideways from early September.
                              • IWO, bull, up since March.
                              • HAL, bull, down since October
                              • DVN, bull on a gap up, sideways since October with a drop this month.
                              • COP, bull, sideways since October.
                              • PG, bull, up since March. This issue has a wonderful uptrend but has been giving some confused puppy signals since September. So, I'd be prepared for a disappointment on this one.
                              • APC, bull, downtrend since September.
                              • EOG, bull on a gap up, sideways to down since September
                              • SWN, bull on a gap up, down since October
                              • ORCL gapped up through resistance today after showing a bull signal on Friday.
                              • V gapped up through resistance today after showing a bull signal on Thursday. It was added to the S&P500.
                              • APOL rose through resistance after a bull signal on Thursday.
                              • BBY blew past resistance after a bull signal on Friday.
                              No new signals on my holdings.

                                12/14 Morningline

                                • Blue chips (SPY) opened at 112, entered bear mode at close on Dec. 8 (at 110). SPY is showing a new bull signal this morning.
                                • Fear index (VIX), 22, bear, Dec. 11 (22)
                                • Treasury long bonds (TLT), 93, bear, Dec. 1 (95)
                                • Gold (GLD), 110 , bear, Dec. 4 (114)
                                • Oil (USO) 36, bear, Dec. 4 (38)

                                Currency pairs:
                                • Dollars per euro (EUR/USD), 1.46, bear, Dec. 4 (1.49)
                                • Yen per dollar (USD/JPY), 89, bear, Dec. 9 (88)

                                Holdings, December expiry:

                                • UNG, covered call (-c9), 9.94, bull, Dec. 7 (9.22). I'm giving up 0.31 profit on the stock, and it would cost 0.99 to buy the call back.

                                Holdings, January expiry

                                • AET, 32, bull put spread (p31/-p32) , bull, Dec. 8 (30)
                                • HPQ, 50, bull put spread (p49/-p50) , bull, Dec. 9 (50)
                                • KO, 59, iron condor (p50/-p52.5/-c57.5/c60) , bull, Dec. 1 (58)X, 47, bear call spread (-c40/c41) , bull, Dec. 9 (47)
                                • X, 47, bear call spread (-c40/c41) , bull, Dec. 9 (47)
                                All in all, a fairly calm opening, except for some large bounces in SPY pre-open and the new bull signal, which must still be in place near the close to be valid. (My rule for trading signals is that a signal counts at the end of the period.)

                                Friday, December 11, 2009

                                More on BMY

                                A quick review of the news about BMY (always a good practice) counsels caution.

                                It was the leader in option volume yesterday, with several imbalance on the sell side notices from the NYSE in yesterday's trading, and also several the day before.

                                A Reuter's article showed increasing short interest in BMY.

                                I normally am not big on news as a decider. However, BMY, as a pharmaceutical company, is more news sensitive than most.

                                Now, no news today, and it could be that the shorts are covering. But all in all, I think there are too many negatives on this puppy. I'm not touching it.

                                12/11 Watchlist

                                BMY rose again today after a bull signal at yesterday's close. It has been in an aggressive uptrend since late October and has about $2 to go until it hits upside resistance set in January 2008. (Yes, I pegged it as a sideways trend in yesterday's Watchlist. I broadened by view.) It's looking interesting as a possible play.
                                BAX, a bull signal yesterday that looked interesting but which I didn't trade, has shown a strong rise for the second day and has pierced resistance set in September.

                                New signals among other high-volume stocks and etfs, with the direction of the signal and the trend in which it has occurred:
                                • ORCL, bull, uptrend since March, sideways since October.
                                • SMH, bear, uptrend since March
                                • HD, bull, uptrend since March (trading at resistance)
                                • CTL, bull, uptrend since March (whipsaw from bear signal given three days earlier)
                                • BRCM, bear, uptrend since March (strong reversal at resistance)
                                • DIA, bull, uptrend since March, sideways since November (trading at resistance, whipsaw from a bear signal given four days earlier)
                                • XRT, bull, downtrend since October
                                • POT, bear, uptrend since October
                                • AXP, bull, uptrend since March (about $4 away from upside resistance, but this is the fifth signal given in 11 days, so clearly the stock in neither a bull nor a bear but a confused puppy)
                                Of those, AXP is interesting because of the distance from resistance, but the false signals worry me.


                                UNG, a covered call (-c9) that expires in eight days, has fallen to 9.53 and remains profitable.

                                Of the January expiry holdings, there are no new signals.

                                X, a bear spread (-c40/c41), which has moved contrary to my bearish position, is pulling back a bit but remains worrisome.

                                AET, a bull spread (p31/-p32) that showed a nice rise this morning, has pulled back to within yesteday's trading range.

                                HPQ, a bull spread (p49/-p50), is stalled at the cusp of profitability.

                                KO, an iron condor (p50/-p52.5/-c57.5/c60) remains above the range of max profit at expiration.

                                No new signals among the indicators.

                                12/11 Morningline

                                The fear index (VIX) is showing a bear signal this morning on a rising price from the open. A bearish VIX is bullish for stocks.

                                Otherwise, blue chips (SPY) are in bull mode, and Treasury long bonds (TLT), gold (GLD) and oil (USO) are in bear mode.

                                In currencies, the dollars per euro (EUR/USD) pair remains in bear mode, and the yen per dollar pair (USD/JPY) is showing a new bull signal on a price rise.

                                Paper holdings:

                                Short USD/JPY is a paper holding in my portfolio. I'm closing now (buying back the position), and have done so at 89.44. The basis was 87.82, so the loss is 1.8%

                                Holdings (with real money; skin in the game):

                                My covered call (-c9) on UNG, which expires in eight days, remains well above the strike price and will be exercised, most likely. I keep the 0.51 premium on the covered call and lose 0.12 on the shares.

                                January expiry:

                                X is hesitating at the top of its large rise three days ago that put it in bull mode, at resistance. My position is a bear call spread (-c40/c41). If the shares break out above resistance, then I'll close.

                                HPQ, a bull put spread (p49/-p50), remains in bull mode with little price movement.

                                KO, an iron condor (p50/-p52.5/-c57.5/c60), is in bull mode and continues to trade about a dollar above max profitability.

                                AET, a bull put spread (p31/-p32), continues to rise in bull mode.

                                Thursday, December 10, 2009

                                12/10 Wrap

                                I don't have any further trades to place today. That's -30-.

                                12/10 Watchlist

                                AET has penetrated resistance decisively on the third day after a bull signal and is a buy at 31.70 or below with upside resistance around 33.70. See the discussion in yesterday's Watchlist.

                                I've opened a bull put spread (p31/-p32) in AET at 31.70 for 0.47 credit. The position is profitable on expiration in January from about 31.55 upward.

                                New signals among the high-volume stocks and etfs, with the signal, mfi confirmation status, and the trend:
                                • QQQQ, bull, confirmed, sideways
                                • ORCL, bull, confirmed, sideways
                                • BMY, bull, confirmed, sideways
                                • SBUX, bull, confirmed, sideways
                                • UNH, bull, confirmed, sideways
                                • QCOM, bull, confirmed, sideways
                                • XLK, bull, confirmed, sideways
                                • CVS, bull, unconfirmed, sideways
                                • BAX, bull confirmed, sideways (at resistance following strong gain)
                                • MT, bull, confirmed, sideways
                                BAX has some interest. I'm not opening a position because of the sideways trend, but it could be a play.

                                The rest are mainly whipsawing in confused puppy mode -- a series of bull and bear signals every few days.

                                Indicators: The VIX bear signal (bullish for stocks) noted in this morning's Morningline has disappeared. Other indicators remain as described.


                                UNG had a sharp rise today and the December covered call (-c9) will be exercised at this level. The trade remains profitable.

                                HPQ, a January bull put spread (p40/-p50) remains in bull mode iwth a price rise today.

                                KO is trading above the upper end of profitability at expiry of the January iron condor (p50/-p52.5/-c57.5/c60).

                                X, showing a bull signal from yesterday, contrary to my Janurary bear call spread (-c40/c41), is pulling back a bit at the upper end of yesterday's trading range.

                                Currencies (paper trade):

                                USD/JPY remains in bear mode and is trading within yesterday's trading range. I continue to hold my short position.

                                12/10 Morningline

                                The VIX shows a bear signal this morning, two days after a bull signal, with little change in level. The true nature of the fear index is neither bull nor bear but rather confused puppy.

                                I add a new indicator, USO, which tracks light, sweet West Texas crude.


                                • Blue chips (SPY), bear mode with a gap upward.
                                • Fear index (VIX), new signal, bull mode (bearish for stocks)
                                • Treasury long bonds (TLT), bear mode.
                                • Gold (GLD), bear mode
                                • Oil (USO), fifth day in bear mode
                                • Dollars per euro (EUR/USD), bear mode with a pause in the price decline
                                • Yen per dollar (USD/JPY), bear mode with a pause

                                With nine days until expiry of my covered call (-c9), UNG is trading a bit above 9.22 and would be profitable if exercised.

                                The January expiry holdings:

                                HPQ, a bull put spread (p49/-p50), has opened above yesterday's close and is tracking nicely in line with my position. This confirming price action comes after a whipsaw of three signals in four days.

                                KO, an iron condor (p50/-p52.5/-c57.5/c60) is trading about half a point above max profit at expiration.

                                X, a bear call spread (-c40/c41), is trading near yesterday's close on this second day in bull mode. It is near resistance and I shall close the position if it is about to close above 47. (X is presently trading at 47.02.)

                                Currency holding (paper):

                                My USD/JPY bearish paper trade, based on yesterday's pps bear signal, is going nowhere at the start of the morning, as it trades upward within the range set by yesterday's decline. (Paper trade means I have no real money on this position; I'm using the trade to test the pps indicator in the currency markets.)

                                Wednesday, December 9, 2009

                                12/9 Wrap

                                X -- a bear holding -- although showing a bull signal remains in line with the trading range of the last few days. So I'll hold it overnight and revisit it on Thursday.

                                No further trades today.

                                Paper Trade: Short USD/JPY

                                I've opened a short paper trade in USD/JPY at 87.82, based on a pps bear signal, confirmed by the rsi, with a declining price in a larger down trend that has been in place since April.

                                The trend is not confirmed by the macd and stochastic.

                                12/9 Watchlist

                                New signals among the high-volume stocks and etfs, with pps signal, mfi confirmation status, and price pattern:
                                • TXN, bear, confirmed, counter-up-trend retracement
                                • PEP, bear, confirmed, counter-up-trend retracement
                                • T, bear, unconfirmed, counter-up-trend retracement
                                • WMT, bear, confirmed, counter-up-trend retracement
                                As a dedicated trend follower, I don't like any of these. They're all counter-trend pullbacks.

                                Or, as the option addict Jeff Kohler said yesterday in a plaintiff scream of agony, "Get me the hell out of this range. Please."

                                AET, which was on yesterday's watchlist with a bull signal, opened this morning at upside resistance and then declined to within yesterday's trading range. It didn't decisively pierce resistance, so no trade.

                                My holdings:

                                X, a January bear call spread (c41/-c40), is showing a bull signal with a push up to near-term resistance. If it pushes through, I'm closing.

                                HPQ, a January bull put spread (p49/-p50), is showing a bull signal today, after a bear signal yesterday. The issue is clearly in super-whipsaw mode, as it has given three signals in four days. I'll hang on for now pending some sort of price confirmation.

                                UNG and KO are about where they were in the morningline.

                                No new signals on the indicators.

                                The USD/JPY currency pair continues to show a bear signal confirmed by the rsi.