3-5% Pullback

Hi Folks,

The market seems to be having trouble getting through this area. Again 137 level in terms of SPY. I still expect the market to pullback 3 - 5% here so my bias of selling the rallies remains. The area of caution is if we break the trend line that I posted a chart of the other day. One of the technical indicators that I look for in a pullback is when the stochastics make an "M" shape and the MACD is inverted. On the 4 hour chart and the daily chart we have this set up in both charts.

Thanks and Good Trading,

Tim

Mess With the Bull and You Get The Horns

Hi Folks,

Well it seems as though this market wants to keep grinding higher. Any selloff is met with immediate buying. Sunday night, most charts looked like the were ready to selloff and they all did Monday morning but then reversed within the first hour of trading. I am still in the sell the rallies mode here. We are in the 137 area in terms of SPY and I still feel that this is going to be a difficult area for the market to get through. Let me be clear I am not bearish. When I say sell the rallies it is mainly in terms of day trading. We could easily keep trending up to the 142 level in terms of SPY.

Thanks and Good Trading,

Tim

Trading This Week

Hi Folks,

It's Sunday night and I'm doing my prep work for the week ahead. Looking at a lot of charts and most of them look like short setups or they are very near. I only found 1 potential long and that is FSLR but it is a short term trade and they have earnings soon so I won't touch it. The trend that has been in place since the October 4th low is still intact. The support for the trend is around 132 in terms of SPY. A break below this could set the stage for bigger concerns down the road.


If we break that trend line as we did in March 2011, it set up the selloff that we saw in July. Notice that even though we broke the trend in March 2011 the market did rally to a new high in May 2011. The trend line then acted as resistance.



Thanks and Good Trading,

Tim

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

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

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

LONG WEEKEND

Hi Folks,

Market very close to a short term top in my opinion. If not for the long weekend I would be buying SPY puts for next week. Markets are closed on Monday so I don't need the extra day of decay. As I mentioned before I think the short term top in this market will be around 137 in SPY and we got close today.

Today I did a quick flip in GOOG Feb 600 puts. I bought them for .25 and sold them for .40. I lost all of my money in my trade from yesterday. I bought the SPY 135 puts for .20 and they are going out worthless.

Have a great weekend!

Thanks and Good Trading,

Tim