The Rally Is Over! May be not..

Posted on April 20, 2009 by BMWFan

The market finally had a major distribution day with the SPX losing 4.28% today.

To many chart readers, this was an easy short:

-> The wedge price pattern was converging
-> Strong resistance was expected at the 875 level.
-> The market was over-bought to a level rarely seen in the

market across a variety of technical indicators.

A lot of observers feel that this was a vicious bear market rally, powered by beaten down stocks in sectors with weak fundamentals, which has now run its course.

Though I too have a short bias, I am a bit reluctant to call the rally toast. From the chartist perspective, we have not seen what we could call a definite topping pattern like a Head and Shoulders, a Double Top, a Climax Top or an Island Reversal. Further it may be a bit premature to assume that the Coordinated Cheerleading being orchestrated from Washington, is coming to an end; some bearish articles or research rep

orts not withstanding.

Several indicators, including the all important Jobs Lost are showing sings of improvement and stability.

Whether these are just a pause in a continuing slide or the sign of the bottom is far from certain.

But if this stream of better than expected economic indicators continues, the rally might not die.

Though the overall earnings situation has been mixed, the technology sectors, especially the more high-profile names are doing quite well, given the circumstances. Both Intel and Tex

as Instruments talked about the end of the inventory glut and a return to more normal demand patterns.

IBM reaffirmed its guidance with an upward bias.

But perh aps the most signific

ant factor which might help propel the rally forward, is that there are a lot of investors who missed out the move from the March lows and are eager to get in.

A conservative trader I follow, bought the financials (XLF) on the dip today.

He is quite clear that it is a not a long term hold, not even a position play; but as a trade he is willing to take a swing. His position was partially influenced by the fact that he had refrained from trading the wild moves in banks in the past, but now sees enough momentum and interest in the stocks for him to feel comfortable to trade the swings.

As the chart shows, the SPX is still in the upward sloping channel. Bye

Bye Wedge, Hello Channel!

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Commercial Real Estate: Pop on GGP Bankruptcy

Posted on April 16, 2009 by BMWFan

Earlier in April the Dow Jones US Real Estate Index and the ETF tracking it (IYR) broke above the March highs.

I had written an article about how to trade IYR with some price levels (both up and down) based on price-level analysis.

I will review the price-action since then.

Price Targets Made: Both Ways

IYR tends to track the broad market (SPY) but with a very high Beta. The technical price levels I had listed turned out to be good reference price points to trade off.

Purely based on technical levels, the upside price targets are: $29.70 (prior support), $30.88 (100% Fibonacci Extension of the zig-zag in March), 31.30 (61.8% retracement of 2009 High-Low), and $33.13 (a measured move up of the box consolidation in March; also a prior swing high). On the downside the targets are $29.33 (50% retracement of 2009 High-Low), 28.33 (March High), $28.07 & $27.21 (61.8% & 50% Fibonacci Extension of the zig-zag in March respectively) and $27.36 (38.2% retracement of 2009 High-Low)

IYR Price Chart

Link to High Resolution Image

The initial break out over the March highs was met with a retracement.

This was not surprising since the sector’s weak fundamentals do not attract much long term money to support the price.

However, as the broad market rally refuses to die, IYR continues to move higher. The sector w as helped by

a number of secondary equity offerings which typically results in support from the underwriters.

The bankruptcy filing by General Growth Properties (GGP) provided a catalyst for the sector today sparking a major rally. Bill Ackman, the hedge fund manager who owns 25% of GGP provided $375 in bankruptcy financing saying that it won’ t be forced

to sell assets at fire-sale prices. IYR rallied to an intra-day high of $33.12, just a penny short of the measured move target of $33.13 I had suggested as an upside target.

Will the Gains Hol

d?
IYR sold off towards the end of the day ending the day at $31.91, almost 4% less than the high of $33.12. Though Wall Street is getting less bearish towards the sector, the fundamental risks associated with the sector continue to remain strong. It is unlikely that long-term money will patronize this sector with any strong conviction.

As a result this sector continues to be

a trade and not a buy-and-hold. I personally purchased some May $30 Puts on IYR as it reached my price target of $33.13.

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Options Expiry and Market Movement

Posted on April 16, 2009 by BMWFan

This options expiry week is turning out to be a lot more interesting th

an March.

The sell-off in late February and early March meant that the rebound from the heavy oversold sections was expected by the Options Market Makers. As a result market makers writing calls were delta-hedging and enjoying the volatility (Vega) and time (Theta) decay.

During this options expiration cycle, the market has continued to move higher against the wisdom of many market participants who have been calling

this a bear market rally which has come up too soon

too fast.

As a result the options market makers may have taken more delta risks than the previous cycle, and may have been delta negative coming into this week. Wednesday and Thursday saw two big intra-day rallies. Wednesday’s rally continued as a Gap-Up Thursday open.

Thursday’s rally gave back some gains at the end as SPX reached the 870 point.

There is a strong chance that these two rallies were driven by institutions who had written calls, buying to cover their negative deltas.

The SPX Index Options settle at the opening print tomorrow. Given the gaps we have seen, there is strong chance that most traders hedged any outstanding risk, adding fuel to the upward moves.

I do not expect the SPX to convincingly break through and close above the 875 resistance level on options expiry day; there are typically too many counter-currents in play this day

to see a convincing move through such a major market resistance level.

The market was this week by the most beaten down (and shorted sectors): Financials (XLF), HomeBuilders (XHB) and Commercial Real Estate (IYR), with the price being chased up.

It suggests that the rally was again driven by shorts (pure equity, call writers, put buyers) closing their positions.

As a result next week will be the week to w

atch to see where this market goes.

A small pull-back is expected.

What happens after that is up in the air, and might as well decide whether we see a 940 print before we see a 740 print.

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Current Stock Market Dynamics: A Review

Posted on April 10, 2009 by BMWFan

The US stock market

has seen massive swings over the last year.

However it is the current rally which has most of the pund

its confounded. In this article I will review the price action and

Review: Price Action
Rebound Off November Lows
The S&P500 rallied from its lows

of around 740 in a November to a high around 944 in early January. This was a classic bounce after a big spike down, helped along by some holiday cheer and a market mentally exhausted by the actions of the previous quarter.
SPX 6 Month Daily Chart
High Res Image
Continue reading →

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Euro: Time To Take Profits

Posted on April 10, 2009 by BMWFan

During third week of March I had argued that the Euro’s spike up against the Dollar would not last and

recommended shorting the Euro against a basket of currencies dominated by commodity driven currencies like the Australian Dolla (FXA) and the Canadian Dollar (FXC). I had added a comment to relative underweight of the Canadian Dollar in the long portfolio since the Canadian Economy is perceived to be closely linked to the US economy.

Since that period, not only have the commodity driven currencies outperformed the Euro, but even the US Dollar has performed better.

FXE vs FXA and FXC

High Resolution Image Here
Continue reading →

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Bank Of America: Poised For a Major Leg Up?

Posted on April 9, 2009 by BMWFan

The stock price of Bank of America made an impressive move today moving up 33.5% with more than one billion shares traded.

The stock chart of BAC is showing a classic cup and handle pattern which I will discuss in this article.

Price Action Overview
Annotated Price Chart of BAC
High Resolution Version
1. The share price started falling in early January. The initial decline from around $15 to $10 did not have a lot of volume.

However once the stock broke $10 the share volume increased substantially.


2. The stock made a low

of $2.53 on February 20 while trading more than 800 million shares.


3. It started rising from this point on.

Once the stock market bottomed in early March, the price rose on increasing volume, making a high of $8.54 on March 19 after a Gap-Up open which could not be sustained.
4. The stock price then consolidated on falling volume reaching as low $5.91.
5. On April 9th, the stock broke out of the consolidation on very high volume, closing at $9.55 having reached an intra-day high of $9.85.
6. The stock is trading will above its 50 Day Simple Moving Average which is at 5.8. The 50DSMA is now sloping upwards which is a good sign.

The stock is trading well below its 200 Day SMA at 18.46
Is this Cup and Handle Pattern Breakout a Buy

?
BAC’s stock price is matching the classic cup and handle breakout pattern to the tee.

However there are some major caveats:
Continue reading →

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Commercial REITS Equity: Caution Ahead

Posted on April 4, 2009 by BMWFan

Commercial REITS Equity: Caution Ahead
The commercial real estate stocks as represented by the Dow Jones U.S. Real Estate Index and the ETF IYR, were the rage last week.

From its low of $23.53 on Monday, IYR rallied as high as $29.41 on Friday, a 25% up move in just over four trading days.

Apart from the general bullishness in the market and the ETF was helped by some analyst upgrades following Kimco Realty Corporation’s (KIM) success in making a secondary equity offering which diluted the existing share holders by 25% at stock price last seen in the mid-90s. This led to a 9.1% up move in the MSCI US REIT Index (.RMZ) on Friday, which was matched by IYR’s 8.96% move up.

Price Action Perspective
Equity prices of commercial REITs have been under pressure as they deal with a credit market which does not have the appetite to refinance loans coming due over the next 12 months.

Equity prices have been under severe pressure with the IYR falling from a high of $94.99 in February 2007 to a low of $20.98 in early march a 78% fall in about two years. IYR traded as high $71 in the Fall of 2008 so the bulk of the fall happened in the last six months.

The IYR has rallied more than 40% from its early March low.
The price action in March has been choppy with large daily sw

ings.

The price movement has used technical price levels generated by Fibonacci Retracements and Extensions as support and resistance, indicating that this is still an instrument dominated by traders rather than traditional Buy Side Investors.


For example Friday’s high was around the $29.33 price level which represents the 50% retracement of 2009 Highs and Lows. The lows of last week of March ($23.53 on March 30 and $23.79 on March 25) were very close to $23.79 the 61.8% retracement from the early March lows ($20.98) to the mid March high ($28.33)
On Friday IYR broke through the March highs of $28.33 on good volume. This positive price action followed three days of green candles on rising volume.


Congestion Zone
Daily Analysis
Click For High Res Picture

The price of IYR is now approaching the congestion zone between $29 and $35 representing the price action in January. The underlying stocks of the IYR (NLY AVB BXP EQR HCP HCN PCL PSA SPG VNO KIM) have all rallied big with many of them reclaiming their 50 Day SMA.

However with a few exceptions, almost all the 50 Day SMAs are sloping downwards, with their 3 day RSI in heavy overbought areas. Typically this is a good short term sell signal.


Continue reading →

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Trading Ultra ETFs on Big Move Days: Some Caveats

Posted on March 24, 2009 by BMWFan

US Equity markets made a mammoth move on Monday March 23, 2009 in response to the unveiling of Secretary Geithner’s Public Private Investment Program to take legacy assets off the book of banks.

The shares of financial companies made a big move with the Russell 1000 Financial Index (RIFIN) moving from 452.21 (Friday close) to 526.12 (Monday High). Investors often trade the financial sector of the market using Ultra ETFs especially the 3x levered FAS (Bullish) and FAZ (Bearish). There are some caveats to observe if you are brave enough to hold overnight positions in these ETFs.

Effect of Daily Compounding: Amplifying Parabolic Moves
The Ultra ETFs compound daily, i.e. the base for the price movement is reset after every trading day.

On a d

ay where the underlying index has already made a big move, this amplifies to the incremental percentage moves in the direction of the main impulse.

On Monday, the base value for FAZ was Friday’s closing value of $35. As the RIFIN moved higher, each incremental dollar move up was reflected as in equivalent dollar amount move down in FAZ.

Though each incremental dollar move up in RIFIN was a smaller instantaneous percentage move in RIFIN, the equivalent percentage move in FAZ kept on going up, as the value of FAZ kept on falling while the base for calculating the move remained the same.

HiRes Picture Here.
Continue reading →

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Sell the Dollar, Buy the Euro? Think Again…

Posted on March 19, 2009 by BMWFan

There are many commentators calling for a continued

decline in the dollar and with the rally in the Euro to continue till at least 1.40 against the dollar following the Quantitative Easing announcement by the Fed. The impact of QE where the dollars printed go in to fill

the gaps in the balance sheets of big banks is being broadly c onsidered bearish

on the Dollar.

However it may not be what it seems to be when it comes to inflation, and perhaps the longer term value of the dollar, especially against the Euro.

The Fed’s objective is to maintain asset prices at a level which allows debt servicing to continue.

As long as lenders use prudent lending standards with their balance sheet’s Fed Enhanced lending power, it is unlikely to result in a credit bubble which will drive run-away hyper inflation

During this credit crisis the ECB and its most powerful members have been consistent in being the Johnny Come Latelies.

John Mauldin’s Investor Insight has a detailed discussion about European Banks.

European Banks are in a worse shape than the US banks with their Eastern European Exposure along with the US Sub-Prime and

their own Real Estate Bubbles.

Basel II Accounting Rules give them a lot more lee-way to take on leverage and like bankers true to their spirit, they did.
Continue reading →

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Trading the Crude Oil Contango with Two ETFs

Posted on February 21, 2009 by BMWFan

The boom and bust in crude oil price in 2008 has increased retail investor interest in this asset class.

Unlike professional traders, most retail investors do not trade oil futures but use ETFs which invest in oil futures contracts.

The dominant ETF in this space is the US Oil Fund (USO), which invests its capital

in the nearest month’s WTI Futures contract. Another ETF which has gained recent investor attention is the US 12 Month Oil Fund (USL) which invests its capital in a basket of futures contracts stretching 12 months forward, with equal weight given to each month.

Over the past few months the contango in WTI Crude Futures has increased to a historically high level; the price of the contract for current month delivery is often $5-$10 less than the price for delivery a few months out.

This is a result of the abundance of physical crude oil available for immediate delivery coupled with a reduction in demand for crude as refiners align their operations with lower economic activity.

Investors in the USO have been losing capital every time the fund rolls over its futures positions to the next month.

This is because the next month’s contract being bought trades at a significantly higher price than the current month contract being sold.

The February roll cost investors almost $6/contract, a full 13.4% of their capital.

The USL which rolls over only one twelfth of its contracts every month did not suffer such a drastic loss.
Continue reading →

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