Saved by the bell

The fiscal cliff drama continued until the last minute today. As expected market was very nervous this week. Yesterday was a particularly bad day for bulls with EMAs giving a "sell" signal and making lower lows on both daily and weekly charts. 

The reason I din't wrote yesterday is because I expected a surprise today and indeed Democrats and Republicans finally made a deal. As far as I understand the battle is not over despite today's last minute agreement, and if the fiscal limit is not raised by late February or early March, the U.S. would default on its debt!!! 

Both daily and weekly charts showed lower lows yesterday but today's action pretty much cancelled yesterday bearishness. SPX slipped bellow SMA 50 yesterday but recovered the lost ground today. 

I wish you a great trading year!

Happy New Year!

babaro

Positive weekly DMI

SPX is still affected by the "cliff" drama but managed to gain a few good points this week. What is noticeable on weekly chart is that the DMI has turned positive. This is a pretty good indication that the long term has turned, once again, bullish. Occasionally, weekly DMI can give a "whip-saw" but let's hope is not going to be the case here.

Daily chart shows pretty convincing higher highs and higher lows. Also notice that SPX is now above a flat SMA 50 and also above rising SMA 200. A "death cross" seems unlikely at this point. 

The two hour chart also looks bullish despite Friday's move down. We have a bullish EMAs crossing and SMA 120 started rising. The most "damage" bears managed to do is pushing SPX slightly bellow EMA 50 but SMA 120 was not challenged since SPX moved above it (1,410). 

Precious metals went down this week and the DMI has turned negative, both daily and weekly. Gold seems to be stuck in the 152-172 range for over one year. A break on either side is going to be significant but for now I expect the lower edge (152) to hold once again.

babaro

No clear direction

Market turned bullish (intermediate time frame) after climbing above 1,410 but the fiscal cliff debate seems to hold SPX back and doesn't allow it to establish a healthy uptrend. SPX is very close to revisiting the break out point, 1,410. Bulls need to defend this level in order to conserve the slim advantage they have at the moment. The good news is that SPX is making higher highs and higher lows on 2 hour chart. The bad news is that SMA 120 is flat instead of rising.

Weekly DMI is neutral after being negative for a few good weeks. Most of the time, in a bull market, once the DMI+ starts rising nothing can stop it. 

The last time weekly DMI+ started to move up then snapped back into the negative territory was in May 2008, a few moths before the big plunge.

Daily chart also shows higher highs and higher lows.

In conclusion, market is bullish on intermediate time frame but the trend doesn't look too healthy at the moment, it definitely needs to move up this week, to defend the 1,410 level. On long term market looks neutral to bullish judging by two indicators, SMA 200 and weekly DMI. 

I talked last time about a potential "head and shoulder" on AAPL. Well, AAPL moved bellow the "neck" and now the HS enthusiasts expect that AAPL is going to lose another 170 points, towards the 360 level. This seems very harsh but it may happen. However, around 470 AAPL has a very good support, its 4 years uptrend line. Let's see if it's going to hold.

Have a nice trading week!

babaro

Very bad day for Apple

AAPL went down 6.4% today in one of its worst day in years. Technically AAPL doesn't look very good. It is bellow a flat SMA 200, weekly DMI continues to be negative and today I noticed what I was afraid a few weeks ago, the "death cross", SMA 50 crossing SMA 200 from above. Last "death cross" was in November 2008. AAPL gave a "golden cross" three and a half years ago at ... $125 and stayed bullish until today.

What I also notice from the weekly chart is a possible "head and shoulder pattern. If AAPL goes bellow 528 we will probably see the stock plunging to ... 350. At least that what HS pattern predicts. It may not go so low since there is a very strong support around 460, the 4 years uptrend line.

The reason I keep mentioning AAPL is not because I own it or short it but because the market cap of this stock is so big that it could potentially move the whole market down! 

"In other news", SPX remains slightly bullish on intermediate time frame but I worry that daily DMI refuses to go positive despite the 60 points gain from the temporary bottom at 1,348. Also EMAs look flat at the moment and SPX is barely above still declining SMA 120. On a healthy uptrend SPX was supposed to be 30-40 points above SMA 120 immediately after EMAs crossing.

Change of trend

The intermediate time frame has turned bullish yesterday after going above SMA 120 (1,408). EMAs did cross a few days before and I was waiting for confirmation from SMA 120. 

Daily chart looks pretty bullish, we have now one higher low and two higher highs on this time frame. What I am a little bit concerned is daily DMI that refused to get bullish despite a pretty impressive rally from 1,348. This is a non-price indicator that evaluates the momentum. 

Weekly chart doesn't look as bullish as the daily one, there is no obvious higher high, SPX closed pretty much at a previous high seen a few weeks ago on the plunge. Weekly DMI remains negative but as I mentioned many times this is not a timing indicator for the intermediate time frame. By the time DMI turns bullish half of the rally is done. 

Very close to a "buy" signal ...

... but we're not there yet. SPX has moved pretty aggressively last week but did not managed to climb above SMA 120 on two hours chart that now is around 1,410, the same area that saw some nice volume on the way down. So we are talking about a decent resistance level. EMAs are touching but they are not crossing yet.

Daily chart shows a neutral DMI but a rise above one of the two downtrend lines. Another resistance level could be around SMA 50 (1,425)

It's hard to believe that market will go straight up from here even if the 1,350 was indeed the bottom.

Look at the volume on daily chart (SPY). Very nice volume on the reversal day (bullish) but decreasing volume the next four days (bearish). I don't usually pay attention at volume in general but I tend to be very careful at potential tops or bottoms since there the volume can tell you the difference between a fake top/bottom or a real one. My guess is that market is going to suffer another decent correction before moving up. Remember that the major support is around the 4 years uptrend line that is now around 1,325.

Weekly chart doesn't tell too much. what is obvious is that SPX did not make a higher high on this time frame. To make one SPX needs to go above 1,415. Also weekly DMI remains pretty bearish, one more reason to think that the correction is not done yet.

babaro

Pre-holiday movement

On Monday SPX moved up 27 points but remained pretty flat today and yesterday. As I mentioned Friday, the move on the upside was pretty much "announced" by the more than 20 points reversal on Friday after hitting a new low. If the move was enough to change the market direction on intermediate time frame, that remains to be seen in the following weeks.

Two hours chart shows a price crossing both EMAs, that are pointing up but no bullish crossing yet. The declining SMA 120 is also 20 points above, around 1,410.

Daily chart looks a little bit better. SPX has managed to climb above SMA 200 and 10 points above the most recent break down point (1,380) but DMI continues to be negative.

Weekly chart doesn't look that promising. I need to see a higher high on this chart, meaning I need to see SPX above 1,410. Weekly DMI remains negative despite this week move up.

SPX is the most bullish index out there. Both Dow and Nasdaq are bellow SMA 200 and both have challenged the four years uptrend line.

It's too early to say market has changed direction on intermediate time frame. SPX needs to rise another 20-30 points to change the trend direction.

Happy Thanksgiving!

babaro

P.S. Do you need some excitement during the trading day? Then trade MDBX, a marijuana stock that went up from $4 to $215 in a couple of days then lost 90% next day, and now it's in an apparent uptrend one more time. Today was 24% up. Don't blame me if you lose your money -)

Compounding effect

More than two years ago I noticed something that didn't seem right, that the 2x and the 3x ETFs did not offer 2x or 3x gains or losses compared to the ETF they were following. I was especially puzzled by FAS-FAZ that were both going down instead one going up and the other going down as expected. They were going in different directions in one single day but over a longer period (two year in this case) they were both losing value. I asked people around but nobody could give me a reasonable answer. Then I tried on paper, I simulated 1x, 2x and 3x transactions and I found part of the answer, namely why a 3x ETF does not give one a 3x loss or gain over a period of time. The reason is the so called "compounding effect".

For example, let's say an ETF is valued $100 , we have the following situations:

1) the ETF is going 10% up two days in a row, the first day it will be valued $110 but the second day is not going to be valued $120, since the second day it will be 10% out of 110 not the initial 100. After two days the gain will be 21%. So we are going into "weird" kind of mathematics:

+10%+10%= +21%

2) 10% down in the first day, 10% down the second day. That will be $90 first day and $81 second day.

-10%-10%=-19%

3) 10% up the first day, 10% down the second day. That will be $110 in the first day and $99 second day.
+10%-10%=-1%

Now let's skip the 2x ETFs and go directly to 3x ETFs. Assume that the 3x ETF is following the 1x ETF. So instead of having 10% up or down we are going to have 30%

a) 30% up+30% up. That will be $130 first day and %169 second day.

30%+30%=+69%

Notice that 69% is higher that 3x21%, the three times 1x ETF gain.

b) 30% down first day, 30% down second day. That will be $70 first day and $49 second day.

-30%-30%=-51%

This time 51% is lower than 3x(-19%)

c) 30% up first day, 30% down second day. That will be $130 first day and $91 second day.

+30%-30%=-9%

Pay attention to c) and also compare it with 3). This is 9 times the loss suffered by the underlying 1x ETF !!! 

This is very important result and the reason of writing this article. So, in other words, if market is volatile, if the 1x ETF doesn't have a clear direction, either up or down the 3x ETF is losing it's value at a very high pace. So I said "what if I am going to short both FAS and FAZ or ERY and ERX. What is going to happen in a one year time frame?" I was expecting the following results: if market was going to be volatile, I was going to gain, if it was going to go mostly up or mostly down I was going to lose. 

 I placed these ETFs in a fake account (on "Wall Street Survivor") in November 2010. Here are the results, after one year, in November 2011.

This was absolutely amazing, every single ETF was going down and since I shorted them, they were all in green. The wining pair was FAS-FAZ. I gained 49.85% by shorting FAS and 12.22% by shorting FAZ for a median profit of 31%. Second best pair was ERY-ERX with 20% gain and the worst was QLD-QID, as expected since this pair is 2x. SQQQ-TQQQ pair (that are 3x QQQ) were also pretty good with a 20% average gain.

A few day ago, after two years,  I looked again at my fake account and here are the results:

FAS-FAZ pair was once again the winner, this time with a 38.5% average gain. It didn't get too much since last year but is still good. Overall the account went up 10% in the last year. Notice that only QLD and TQQQ are in red.

Timing the entry is pretty important, is good to enter after a decent leg up or leg down since market sometimes goes sideways for a while. I also noticed that is good to enter at a level that is going to be visited again. The longer it takes the market to come back to the entry level the higher the gain. For example I entered in the middle of a rally and I started with a loss for a few months. Not a big loss but a loss nevertheless. 

The beauty of this system is that you don't care if the market goes up or down you are winning anyway if the market is volatile. And guess what, market is always volatile over long periods of time!

I don't know if you can make actually money with this system, for example my broker doesn't let me short FAS or FAZ or any other 2x or 3x ETF. If you know a broker that let you short these ETFs please let me know. Even if you are allowed to short them you may start with a loss and you may get a margin call and forced to cover.

Even though you cannot make money with this system keep in mind that your 2x and especially 3x ETFs are losing value all the time. Keep in mind that the compounding effect is not the only one responsible for 3x ETFs decreasing value but I think is the most important. The financials were indeed the most volatile and no wonder that the FAS-FAZ pair was the winning one. What is hard to "digest" is the incredible loss both ETFs have suffered since inception.

I can easily make 30% profit per year but I need to work hard, I need to be very objective and why not, I need a little bit of luck. But getting 30% profit for sure no matter if market is going up or down, this I can take any day. 

Please let me know your opinion. You can send me an e-mail at babaro13@yahoo.com if you prefer.

babaro

Another week on the downside

SPX moved up a little bit today but ended up in red for the week, losing about 20 points overall. Market remains bearish on intermediate time frame but notice that today was a reversal day after touching a new low. Sometimes this is an indication that market wants to change direction. I am not going to cover my shorts yet but I keep this in mind and going to act in case EMAs give a bullish crossing.

SPX is no less than 60 points bellow declining SMA 120 on two hours chart. This is quite a lot and I expect the difference to get smaller next week, meaning that I expect a flat week or slightly on the upside.

Weekly chart shows that SPX managed to stay above the 4 years uptrend line that resides around 1,320. Weekly DMI remains negative meaning that long term remains bullish but seriously challenged at this point. For the long term get negative I expect an obvious move bellow the bull market uptrend line and also to see EMA 25 crossing EMA 50 on the downside on weekly chart for all major indexes.

However, Dow is slightly bellow the bull market uptrend line (12,600).

AAPL continued it's fall this week, but got support around previous low, 530. Its major support is around 460, the 4 years uptrend line.

UNG, an ETF I keep showing on this blog, it's behaving as I predicted. It did move up before touching the lower edge of the trading range. This is bullish and is going to be even more bullish if UNG is going to push above the upper edge of the trading channel that is now around 25.5

All the best!

babaro

P.S. Come back on Sunday or early next week for an interesting study about 2x and 3x ETFs

Worst week in five months

SPX suffered a big drop this week, losing no less than 35 points.

SPX is now just bellow SMA 200.

There is now a fight between Democrats and Republicans about the nasty drop after elections, 48 points on SPX, which Republicans say is due to Obama's re-election. I don't really want to go into such discussion since I am not that interested in politics. If you want my 2 cents opinion here it is: as I mentioned a few times in the previous posts market was already in a corrective mode so a drop was more likely than a rally but at the same time is hard to believe that elections in the largest economy in the World did not have any effect on the market. 

Anyway, back to market behavior, it's worth mentioning that the weekly DMI is now in red. You know that I consider this a pretty good indicator of the long term market direction. In a bull market, like we are now, a weekly DMI switch from positive to negative is merely a confirmation of a downtrend, not necessarily a good timing indicator. From previous times when DMI switched from positive to negative I noticed that market did drop after this event but not that much, the bulk of the plunge was already there. Since the SMa 200 doesn't seem to be a very good support (I am saying this because the other indexes are already bellow this level), the next big support is going to be the four years uptrend line that now is around 1,320 (or 12,600 on Dow). Please note that the March-June drop did not go all the way to the uptrend line, market starting a new uptrend before touching this level.

If you are investing long time you should not panic since the long term is still bullish despite being challenged at the moment by the negative weekly DMI. Since March 2009 SPX continued to make higher highs and higher lows. You should worry if market goes bellow the uptrend line (1,320) and especially if it goes bellow the previous low, 1,280. If it goes bellow 1,280 SPX is going to make a lower low that is not going to be good for the bull market.

On intermediate time frame SPX is bearish, as expected. On two hours chart SPX is 40 points bellow the declining SMA 120 and about 20 points bellow EMA 25. This is not that much, I can easily see another 10-15 points drop but more likely market will trade more or less flat next week unless some major news hit the market. 

An ETF I previously mentioned is UNG, the natural gas ETF. As I said, UNG is now at it's most bullish momentum in 4 years. Notice the golden cross and the positive weekly DMI. Is trading in a pretty nice trading range and now is almost touching the lower edge. If, and only if UNG is going to find support at the lower edge of the trading channel, that is going to be a good entry. 

Have a nice weekend!

babaro

P.S. My kid won the soccer championship this year. He is very, very happy.

Weekly DMI has turned negative

Day not over yet and bulls trying to contain the loss as I write this but one big indicator has turned negative this is a big deal. I am talking about weekly DMI. I don't know if it has anything to do with Obama being re-elected but market is plunging big time. It was in a correction mood anyway, as I mentioned in the previous posts.

Two support levels on daily chart were also broken, 1,408 and especially 1,400. Bulls may manage to push market above 1,400 by the end of the day.

Two hours chart only confirms what we already knew, that intermediate time frame is bearish. Note that SMA 120 is pointing down now.

After hours update

SPX did not manage to stay above the support around 1,400. Five points is not a big deal but bulls worked really hard this afternoon to defend 1,400 level.

SPX is slightly above the first obvious support level, SMA 200 but all other indexes, Dow, Russell 2000 and Nasdaq are already bellow SMA 200.