Wednesday, February 22, 2012

DOW THEORY

Hi Folks,

One of the principals of the "Dow Theory" is that the stock market averages should move in tandem in order for the trend to stay intact. The idea is that if the industrials are doing well then the transportation stocks that ship their goods should also be performing well. According to the theory, the transportion index generally leads the other indexes. If you buy into this theory then there is a divergence occurring right now. Coincidentally it occurred about the same date I changed my bias from buying the dips to selling the rallies. I do not follow the Dow Theory personally but it is worth noting. While the Dow Industrials have been climbing since the beginning of the month the transports have been selling off.

The market is still looking like it wants to pull back some more. I am looking for the market to hit 132 - 133 in terms of SPY short term. The indicators that have been successful for me still show the general trend is still up, just a short term bearish bias. We are extended above the moving averages and need to come back and test them.

Thanks and Good Trading,

Tim

Tuesday, February 21, 2012

DOW 13,000

Hi Folks,

The DJIA hit 13,000 briefly today for the first time since May 2008. The SPY traded 137.05 and backed off as I had mentioned I thought it would in previous posts. I still expect the market to struggle a bit against this level so my bias of selling any rallies is the same. However, I like to see the longer term moving averages flatten before I see a larger reversal. Below are images of the 4hr and 2 hr charts. You can see that the 34 Moving Average(red line) has not rolled over or flattened. It is still trending up. This should make it easier to understand wht I mean by flattening moving averages.






Thanks and Good Trading,

Tim

Sunday, February 19, 2012

LULU SHORT?

Hi Folks,

I feel like now is a good time to short LULU. This is a bit of a longer term trade rather than a day trade. I am looking to do this through options. I am looking at the March 62.5 puts. In doing this I am getting the right to sell LULU stock at 62.5 before the 3rd Friday in March. My target is $55 in LULU stock. The stock is currently selling at $65. I am hoping to buy these at $1.75. 1 option contract is equal to 100 shares so, if I buy 1 LULU March 62.5 put at $1.75, my cost would be $175(100 shares x 1.75). My breakeven point on this trade is for LULU stock to be trading at or below $60.75(62.5 strike - 1.75= 60.75). If LULU gets to my target of $55 before March expiration, the option would be worth $7.5.

If you own LULU stock and want to keep the stock but want to buy yourself some protection from a sell off in the stock, you could "collar" the position with options. You could sell a call and buy a put with the proceeds from the sale of the call. Here is an example. You own 1000 shares of LULU stock now trading at $65. To protect yourself from a sell off you could sell 10 June 67.5 calls for $5.80 and use that money to buy 10 June 62.5 puts for $5.80. 10 contracts x 100 shares = 1000 shares which is how many shares you currently own. So if the stock is trading at $55 at June expiration, the calls you sold are worthless and the puts you bought are worth $7.50 and you still own the stock.


Thanks and Good Trading,

Tim