EEM Watch

The exchange-traded fund that tracks emerging markets, EEM, is showing a bear signal on the parabolic sar.

	trend	adx	psar	pps	macd	macd trend	sto	sto trend
EEM $43.13

I dislike EEM as a directional trade. The average directional index, which shows the strength of the trend, is 24. That's not super-low, but it's marginal.

You could say that I suffer from Adx Bias Disorder, an acute psychological malady. But maybe I'm wrong in this case.


The stock has been trading sideways, between around $38 and $45, since last September. So I would be shocked if it went much below $38.

Having said that, $38 is about 12% below the current price level, so that's a respectable gain.

I see two ways to play it. One would as a bear vertical spread, or perhaps I would just buy some puts. The other would be an iron condor with maximum profit between $44 and $36.

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Buy--DON'T Hold: Investing with ETFs Using Relative Strength to Increase Returns with Less Risk

Financial consultant Leslie Masonson describes a strategy for actively trading exchange-traded funds.

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Let's look at each:

Buy a put. The put to buy under my rules is the September $46 put. That would cost me a $4.80 premium debit, or $480 per contract, with a breakeven price of $41.20 and an unlimited maximum profit against a $480 maximum loss. And I don't have to worry much about time decay until August.

Bear vertical spread. Under my rules I would do a bear put spread for a 51¢ debit, or $51 per contract, buy going long the May $44 and short the May $43. The break-even is $43.49. That position gives me a maximum profit of $49 per contract, and a maximum loss of $51. Nearly even odds. I like that. The whole position disappears on May 21.

Iron condor. I would structure this as short the May $44 call and the May $36 put, and long the May $45 call and May $35 put. That gives me a 39¢ credit, or $39 per contract. The breakeven points are $35.61 to $44.39. Anything above and below that range starts to shade in to unprofitability. The position shows a maximum profit of $39 per contact, and a maximum loss of $61 per contract.

I pay attention to the max profit to max loss ratio. The iron condor is not good in that respect. Also, an iron condor has two ways to break your heart, to the upside and the downside. A vertical spread can only break your heart in one way.

Another consideration, an iron condor can't be adjusted easily if the trade goes against me. The other two positions can.

The iron condor would work if the spread between the high range and low range was relatively narrow.  But 12% gives me a lot of downside to work with.

All in all, I like the vertical spread best. An even risk to reward ratio, and cheaper than buying the put by an order of magnitude.

You are here:

• Reversal
• $47.86, +11%
• $44.40, +2.9%
• $43.84, +1.7%
• Now $43.13
• Reversal
• $40.75, -5.5%
• $39.66, -8.1%
• $37.76, -12.5%
• $36.18, -16.1%

This signal will be followed in the daily Watchlist, which is posted beginning around 2:45 p.m. Eastern. Look for it at www.timbovee.com.

Abbreviations:
psar - Parabolic Stop and Reverse
adx - Average Directional Index
pps - Person's Proprietary Signal
ma20 - 20-day moving average
macd - Moving Average Convergence-Divergence
mfi - Money Flow Index
sto - Fast Stochastic   

Exchange-Traded Fund Symbols:
EEM - emerging markets
EUR/USD - euro/dollar currency pair
GLD - gold
JNK - high-yield corporate bonds
SPY - blue-chip stocks
TLT - Treasury long-term bonds
USD/JPY - dollar/yen currency pair
USO - crude oil
VIX - fear index

About the glance:  The colors indicate the state of each signal.

• trend: Determined by the 5-day moving average, green for up, red for down, yellow for sideways
• adx: orange for above 30-up, blue for 20-down, purple for in the middle. Red is most prone to whipsaws
• psar, pps, macd: green for bull mode, red for bear
• sto: green for overbought, red for oversold, yellow for the neutral zone.

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