Fun trade(II) -- GIGM

Our previous fun trade, which we were eyeing for today (Visa) died even before the market opened. It is quite difficult (atleast for us) to predict what happens during earnings. Therefore, we rarely play stocks into earnings. Anyways, we are eyeing another promising fun trade in the formation. The above chart is of GIGM. As can be the chart has a nice ascending triangle with bullish divergence on the MACD and rsi. The first target for us is 14 on this, if the breakout does happen, which could be a nice quick 10%. If the upward trendline does get violated, we bail.

V for Visa (Fun trade)

Above is a chart of Visa, as can be seen, V has been descending albeit slowly for the last 2 months or so. (could this be consolidation for another leg up, who knows?). Anyways, V is now against the descending line. We are hoping it will break it and we could get a nice quick 10-15% long trade on it. Our reasons, are basically, bullish divergences on the MACD and a beautiful HnS on the chaikin. This hns on the derived chart, can be thought of the product of noise reduction on the primary price chart. This is strictly a fun trade for us as of now, in the league of our past few trades DENN & CPSL.

On a side note, we tested our hypothesis on the UNG trade and bought another sizeable portion, on a break of the bottom today. We were not disappointed and are nicely in the money on this. We want confirmation though and tomorrow is the big NatGas inventory report. But we still favor a sizeable bounce in UNG. Lets see!

Commodites - A second line of defense?

Commodities have been in a bull run since 2002. The last two weeks have seen commodities take a hit. As we had noted in our earlier posts rightly, oil/ natgas/ metals/ ag had gotten ahead of themselves. There are analysts on CNBC talking about going back to the 90s oil, due to demand destruction and the bursting of the commodity bubble.

Above is a chart of the commodity tracking $CRB index. Clearly, this has taken a hit in the last three weeks, as indicated by the 3 red bars.

Usually, such steep trends cannot be sustained and usually return to their baseline trend. In the figure are two gentler trends.

• A steeper purple trendline, which coincides with a 38% fib retracement.
• A less steeper black trendline, which coincides with a 50% fib retracement and possibly also the 50WMA, a further correction of 5-6%
  

The next couple of weeks, will be key in the commodities cycle. It is rare that multiple trendlines are broken in one direction, without a bounce. For now, we wish for the purple trendline to hold. In the worst case scenario, we expect the black trendline to hold. The SMN (ultra short basic commodities) charts are also showing bearish divergences, so the picture is not entirely clear to us. We may just have to wait and watch.

Gold (An update)

This post is a follow up to our earlier post on gold stocks GLD and AZK. These are almost at the bottom of the trendlines, probably another 5% or so more correction is in order.
Link to the earlier post -- (http://maybeitsclarke.blogspot.com/2008/07/gold.html)

As expected, gold has been consolidating since. As shown in the post above, it is almost on the verge of hitting its downward trendline, which it broke out of. While we have been waiting for this opportunity since last week and as the charts have filled out, somehow the high sell volume bars in GLD and in gold stocks have put us off a bit. The trade probability is now down to 60-40 in our mind. There is also a bearish MACD divergence on the gold chart (as the line in purple indicates). While these don't always come to fruition, when we even see faint hints of "stop", we need to stop and re-evaluate, as the charts fill out in the coming week.
We will watch gold closely here into next week - should gold bounce off the downtrend line, we will catch its action, but we don't want to be the first one in on this trade. Another thing to remember is the line is a downtrending line, so everyday the support keeps descending and it could be some days, before gold actually gets traction.

As of for our commodity exposure, we own UNG, which we scaled in around the 200d and 50W. We did not expect UNG to go low after that, but we still like it here. Next week may be a totally different story though. Lets see!

$ vs. ¥ (Dollar versus Renminbi)

The charts above are of the Chinese Renminbi and of the US dollar.

US Dollar: It has been in a long term downtrend. Recently, a bearish head n shoulders pattern has been emerging. In this right shoulder formation period, commodities are getting hammered. Ofcourse, the inverse correlation doesn't hold steadfast on every trading day, but in the long term - dollar down means commodities up. So when can we see the dollar resume its fall?

We believe that the dollar index can rise upto 73-74 region (corresponding to the UUP in 23 region), once the UUP breaks the neckline, we can see a dollar plunge, probably corresponding to another dip in the markets. By this picture, this could take another month or so.


Renminbi: Contrary to the dollar, the renminbi chart is looking bullish, it is in a gentle uptrend, with an upward slope of appreciation rate of over 7-8% for an year. If only our 401K were denominated in chinese Renminbis, instead of in dollars.

Gas

Above is a chart of UNG, a natural gas ETF. While oil has been falling "less" slowly, UNG has taken a plunge quite fast. It is now sitting at the 200d and at its long term 61.8% fib retracement. The stochs, RSI are oversold. There are inklings of bullish divergences on some of the other oscillators.

We are long on this for a jump to around the 53 region. This is our first target. We can make case for UNG to go up around the 57 area, but we will take 53 as our first target for now.

Is oil a bubble?

Above is a chart of the USO. We had earlier ranted on snotwheel.blogspot.com (whom we owe a lot of our TA learning to) about the odds being against oil.

Shown in the chart, is the action that shows the result, which is the breakdown of the steep channel. This breakdown, only indicates that oil's climb was too steep to sustain. But nevertheless, it can still climb. Analogy time, this is akin to an athlete's pace in a marathon. The peak running speed cannot be sustained, nevertheless there is still gas left for a sustained slower pace.

Deceleration in a stock's growth happens in stages. The green line will surely serve as support once. We believe oil will drift higher next week, whereby it will be poised to drop another time, ,probably, piercing through the green trendline this time. This could coincide with a push on the DJI higher.

We believe the gentler purple line, around 85 (now) will hold in the long term. This line has a slope of ~20$ per 5 months, thus yielding a conservative estimate for the price of oil (barring unforeseen discoveries etc.), of > 135$ by year's end. We also believe that the story of commodities runs somewhat parallel to this one, but that is a story for another post.

Gold!!

Above are charts of two gold companies - GRS and AZK. This is our first time in Gold. Sure the time to invest in gold was in 2001. But we believe Gold had its time in the media last november when it raced to over $1000. It also had its "crash". It has been sulking away, consolidating beautifully (look at the GLD) since, and is looking to recapture its time in the limelight (which has gone to oil recently).

Historically, Oil and Gold trade in a ratio of 10:1. Oil is just about correcting to about $130. I believe Oil will correct to about 120$ or so, coinciding with a rally in the DOW. We expect Gold to hit 1200$ or so by the year end at least.

Accordingly, above are some Gold stocks we are looking to load up on hit of their bottom lines. These charts are looking nice and bullish. We believe it will be gold's time in the limelight soon. How about that for sector rotation?

fun trade -- CPSL

The CPSL chart looks like having a strong support around the 3.95 region and recently, rebounded off that level. The stochs weekly, daily are also conforming, so is the MACD histogram with a bullish divergence. We think this stock has legs for a 10-15% profit, upto its 50d.
A quick fun trade post. This is strictly a fun trade for us, profitable also we hope. Go CPSL!

Agriculture

Shown Above are the charts of a few Ag (CF, MON, POT, Agu) stocks. These stocks have strong trendlines and have performing very well for us and other faithfuls thus far. But in this "iteration", these stocks have begun to show signs of tiredness.

There are MACD divergences all over their charts. Furthermore, in their previous iterations, these stocks went right up to the top of their channels before, coming back down. This time around, some of these are faltering. Of these MON, is probably the weakest and is sitting right on the bottom channel. Also, it has failed to make any significant new highs in its iteration. Probably the strongest of these stocks is AGU, though the stock is at the top of its channel.

We are not saying the Ag story is over. It is definitely on, we only believe the steepness of the growth cannot be maintained - a gentler slope uptrend is most likely.

On a side note, are these stocks signalling to us that there is a rate hike somewhere on the horizon of the next 6 months?

When will the bleeding stop?

The above is the chart of the VIX. As seen from around the start of MAY, it has been inching its way slowly and is up to 31 today. The bleeding has been constant and orderly. There have been no signs of capitulation in general, Probably the bank stocks have seen capitulation. But the VIX is still a good 20% away from the yearly highs.

To use David Tice's analogy: January and March were akin to a frog in boiling water and the frog quickly jumped out. This time around, the heat is being turned on gradually. So the frog is ignorant.

The VIX is at the top of its channel. There is a small bearish divergence in the VIX. Do we see capitulation? Are there too many people watching the VIX that we will never see a capitulation but a rounded bottom?

Brazil - EWZ

Above is a chart of EWZ, an ETF tracking brazilian shares. There is not much to write about here, but as goes the commodities so goes brazil. We are looking to scale into EWZ to make another iteration in the channel. We are right on the bottom end of the channel, the stochs oversold and the RSI is just about lifting off. Somehow, we believe this will be the last iteration. But that is a story for another month.

Signs of a bottom -- A shy bull?

Today is july 10th. I had earlier said we will know how oil does by July 10th. And we do know, oil has dropped about $5, but the market is still under stress. But today's action was encouraging for the bulls. Ofcourse, calling bottoms in bear markets is an atrociouly difficult situation. We will try and present a case for the bulls here. First we will cover psychology and then some technicals as evidence.

1. Today's volume was huge. To the casual eye, it may seem we had a small upday in the markets. But it was one of the most interesting days to me, as a learning experience. The market was battered down with heaps of bad news. It was hit with Fannie Mae, Freddie Mac, Lehman Brothers, you name it and still the bulls managed to win today on strong volume.

2. As if that was not sufficient, the bears used another potent, now well-tested weapon of theirs. Oil suddenly spiked up 5$. But the bulls still won.

So, the two time tested weapons for the bears seem to be impotent today. Is this the start of something new?

1. Above is a 10 day, 10 min chart of the XLF. Believe it or not, despite the heavy selling in financials today, we see bullish divergence or signs of accumulations in the charts.

2. We see a "dirty" inv Head n Shoulders in the QQQQ. This may be our illusion in sticking to our guns. But we have similar bullish divergences on the Qs too.

The value of this rant, whether worthless will be known tomorrow. Nevertheless, we love these inflection points as learning experiences. As of now, we are a shy bull.

Mac, not Indy Mac

Action:

The chart above is that of Apple computers, of Mr. Cramer's last remaining horsemen fame. We love Cramer for his entertainment value of course, his picks nah! We believe a man does one thing best.

Anyways, this chart has been downtrending in a tradable $15 downward channel for the past 2 months. It has also "observed" its fibonacci retracement of 38%. The downward tilted channel is usually bullish. Furthermore, the longer the time the stocks stays in this tight channel, the more energy or bounce it gets when it breaks out. Right now, AAPL is at the brim and underneath its 50d.

Guess:

We believe that AAPL may break out of this channel to the upside. The stock looks well rested, and ready for a leap to 200.
Ofcourse, this theory is dependent on a confirmation of the rally today (July 8th). Ideally, we would like to see a pause day. Perhaps more bullish and preferable, would be a couple or more miniature sell days, of the chinese water torture variety. Often, it helps to think of the market like a marathon runner. We just witnessed a huge forward thrust. We need to rest, so that we can sustain our speed in the long term and not be just a shooting star.

We will load up on our longs SSO/UYG/QLD/AAPL etc on any small dips. Ofcourse, all bets are off if we sell off huge again.

Aces High

Above are charts of LUV, AMR and UAUA. As can be seen, these stocks have been in a steep downtrend. They have been reduced from their lofty perches by an order of magnitude, for AMR and UAUA.

We note some bullish indicators on these:-

1. LUV has been the strongest and has not sold off with the DOW.
2. AMR has a bullish wedge formation. We believe AMR will crack out of this wedge soon.
3. UAUA and AMR have bullish MACD divergence all over their chart.

This year, we have seen the bankruptcy of over 20 airline companies. As Jim Rogers, recently uttered in his interview - "How much more bullish news can there be?". Furthermore, Oil is at sky high and has seen the steepest rate of increase in the past year. We believe the airline industry will consolidate (and has started doing so) i.e. fewer airlines and accordingly

1. Weaker airlines bought out by bigger ones or go bankrupt
2. More importantly, fewer players mean greater pricing power.

We believe, the airline industry will do better over the years. In the shorter term, we expect a correction in oil soon. Airlines will see a huge bounce in their stocks on any oil correction - possibly more than DTO (the double inverse of oil itself). We don't like to bet in downtrending stocks, this is a play trade for us. We made some quick profits on UAUA today. We do believe there is some ways to go on the upside in these stocks.

Pivotal position -- To go long or Short?

Action:

Above, are some of the major indices DJI, SPX and TRAN respectively.
As can be seen, we are at right at the deciding positions of these charts. Today's sell off took the charts right on the doorstep of the killing fields. Any break of these lines, and things could get very ugly.

We are hoping for a bounce in this market, due to our small long position. True, the bounce has been elusive thus far, and we are on the threshold of a major fall here. But we are still believers in a rally, since we see some "not-so-bearish" things on the charts.

1. There is a bullish MACD divergence on the SPX, DJI.
2. The stochastics on most of the indices are oversold. They have not been so oversold for a long time.
3. The number of bears given the PCR (put call ratio) is overwhelming. My skim on some of the ETF Yahoo message boards, confirms this opinion, not that it is an effective indicator. But everywhere in town, it is painted red.

Since, we need to see what risk exists on the downside, if we do continue selling off, this market can see 1200's on the SPX very soon. In our opinion, the next 3 days could be the key. We are expecting a rally within the next 2-3 days. The bounce if it does occur could be a big one, given the amount of shorts in this market. We believe 12200 on the DJI, is not impossible. But right now, this rally is hostage to OIL. We absolutely need OIL to crack here. Every other commodity has taken its beating expect oil. Even metals/coal sold off today, as we thought would happen in our previous post. Lets see!