This blog sucks!

If somehow a blog can become part of my trading preparation, this blog may get some posts. Is that likely?

Either way check out Ron Paul for President. Rally in Philadelphia this Saturday.
http://www.ronpaul2008.com/

Estimated Start Date 10/07

Yeah, I lied. I'm still going to do this though. 10/07... See the trade, take the trade.

Back next week.... to start for real

The run home for a few days between Chicago trips became a nightmare of delayed flight, missed train and sickness. I'm back in Chicago now to attend the TOS Advanced Options workshop until this weekend. Too bad as there is great action in the market. My previous posts show what I am watching for in the market as things are working out as expected.

September 3 I will begin the blog. I knew starting this before the Chicago trips was a bad idea, but at least now I know a bit more about what it takes to write a blog.

If you want me to add your e-mail to get alerted when there is a new post send me a note at smokeisms@yahoo.com

Chicago!

I've been at the Investools Chicago conference this week. It certainly blew away my very low expectations. Could be that I would even recommend any Investools student go ahead and attend these when they happen. That is something I never thought I'd say. I had little access or time for internet connecting so not much market watching going on therefore no time to move the blog forward.... but the conference did remind me that the purpose of this blog is to expand and work through the options trading so with any luck I will not forget that when I get home tonight.

Well, it is getting toward mid-day and the $SPX is pushing its 200 day MA and getting nearer to the downtrending line off the peak. $INDU is pushing the resistance at the June lows and $RUT is at the "neckline" of the double bottom and close to the 200 day but still a little room there. You know that I expect some sort of test of the lows again so now is the time to reevaluate some short term long plays and look for the short plays.

I'll post some charts by tomorrow morning but will say if the move down for the test develops, watch the $VIX. If a low is found in the market with a lower high in the $VIX this would show the healing process in full swing and turn me at least neutral intermedaite term with more acceptance of long plays off that low.

Correction status, Index Overview

Even with today's wild ride giving us a hint of capitulation and perhaps stabilization going forward... at least in terms of crashing to new lows every day if not intraday volatility... we will remain in a correction until an uptrend resumes. As I said the two important things are to not call bottoms and we will test the lows. Therefore, any bounce that may develop here is still suspect and only part of the healing process. The test will come and it has to be successful to take the next step of a neutral to bullish outlook. Some comments on the indexes.....

Clearly the $SPX went crashing down to the March lows and found support there. Could call that candle a hammer, even a bullish harami. So a downtrending index with a bullish candle pattern... nothing but a short term countertrend signal if confirmed. While we can see the support from the March lows, the candle itself today shows us where the support is, where the buyers are. Lucky for intraday traders today the buyers showed themselves plainly by holding up the market in the face of the unwinding carry trade. I have marked in an oval a similar candle in the correction during March, note this bullish candle did not confirm and the market plunged anew. But, the low of that candle still represented an area of support that did end up holding. So if similar action develops here, we can have that one eye open for it. In short, potential stabilization, confirmed bounce and we look for the test in the coming days/weeks.


The DJIA and the $NDX were the leading indexes into the peak and continue to show their relative strength by making an attempt to hold the 200 day/February highs today. Yeah, it is ugly, but they are relatively strong. I made the post about tests of the low that don't necessarily have to go all the way back to the low.... that was about the $RUT which ended up making a new intraday low... but you can see in these charts that if a bounce develops here a test could actually just come back to the 200 day and not necessarily threaten the actual lows. That would be very bullish if we see that.

OK... the $RUT.... side note: I was short an Aug 700/690 put spread coming into today and I could not believe with only hours to go I had to worry about tomorrow's open!!! Kept thinking about a 5% fall putting us at 713... oh my oh my... ended up legging out buying back the 700 for .15 and then selling the 690 for .10.... so .05 debit not that bad even though it was not really at risk. Ameritrade needed some more fees from me. But the $RUT... so it LOOKS like we have relative strength here right? I mean classic double bottom potential, a test of the lows with a bullish engulfing candle! Woho! Here we go right? Perhaps... if I saw the $SPX, $INDU, $NDX join in the fun with this type of pattern I might even change my intermediate term outlook to neutral with confirmation. Getting through the test of the low is a step needed before you can get the correction over and uptrend resuming. BUT... what is concerning to me here is that the $RUT was relatively weak going into this correction. It failed to hit a new high with the large cap indexes and had in fact been lagging for months. So the relative strength we see on the chart here in the very short term is deceptive from an intermediate to long term perspective. You can see this in the distance the $RUT has traveled underneath its 200 day moving average. Therefore I do not see this as a leading indicator that this correction will have a successful resolution and continued uptrend thanks to strength in small caps, the leadership remains with the large caps and they have more work to do to get us out of this corrective phase. Thinking down the line, if we stabilize for a while and ultimately resolve to the downside into a bear market, I would look to the $RUT to LEAD to the downside due to the relative weakness it exhibits currently on the intermediate term. So that is a bit ahead of the game but it is the reason this otherwise nice looking test of the lows does not move my bullish needle right now.

Who says they don't ring a bell at the bottom?

Although this blog is too young to have covered this except for one sentence, I'm sure you have not missed in the media the discussion of the yen carry trade. Yen goes up, market goes down. It is amazing how true this has been down to the minute charts.

Check this out today.... These are 1 day 5 minute charts from today of the S&P e-mini's and FXY, the yen tracking ETF. Of interest is the action between 12:40pm and 1:10pm. Note how coming into this period they were moving inverse to each other as they should. The S&P futures tanked to new lows as FXY rocketed higher. Then as FXY continued to rocket higher for the next 20 minutes the S&P was showing support!! This is a bullish divergence (for stocks) in this relationship showing buyers stepping in despite panic buying in FXY. Truly amazing to see. This is a fun relationship for any intraday traders out there.

So for short term trades, no doubt today finally saw some capitulating action we have been waiting for to make any assumption that stabilization had arrived. Huge record volumes and reversal candles. On follow through could begin to have slight confidence in long trades but the trend certainly remains down.... so a bounce will also set up potential short plays. I'll be traveling for the next week but I hope to be able to plan out some trades here.

SWEB, ABAT, WRLS update

SWEB: Well, I guess I should have asked for more than just "we are on track".... that was about the best thing said on the conference call. Problem is the track is a bit too far out in time to expect the stock to rise and contains so many questions and unknowns it will probably weigh on the stock near term. Best I can hope for is that investors feel it is "on track" enough to keep it near $1. With the state of the market I am not so sure. If progress is made in the future I will post again on SWEB... until then the details are meaningless.

ABAT: Nice to see it get the breakout. That was the easy part though, now comes the hard part to HOLD the breakout in a crashing market. Good luck to us.

WRLS: Achieved its first short term target of $6. Yeah it got close enough the past couple of days but actually got the print today. If the intermediate term play on this stock can survive the meltdown it could be showing us it will do well coming out the other side. Certainly a tall order in this market.

Nothing new for tonight, did you know we are in a correction? Which will it be.... crash or capitulation? Either way, enjoy!

Stockgroup Reports 108% Revenue Increase

All I wanted from SWEB was "we are on track" and that is exactly what we got in this earnings release. Absolutely no trading volume yet which is interesting. One sticking point last quarter was advertising revenue was only up 5%, this quarter a much more reasonable 27% increase.

So, I may add a bit more down here which we are near the support of the sideways range. Conference call after the market close today..... I'll post some notes and we'll see if there is any interest in the stock after that. Hopefully they are not saving the terrible news for the CC.

Potential ABAT Breakout

World falling apart? Maybe some polymer lithium-ion batteries can save the day or a portfolio or two. ABAT is another stock that was very good to me earlier in the year and has based out. Earnings were out yesterday morning and look good once again. While the stock did not break out it did manage to hold up despite the carnage all around. It equaled its closing high of $3 for the past several years. As you can see it has had two spike highs to $3.13 but has not been able to hold. IF it breaks out targeting $4 to $4.50. Initial stops below $2.80. If the market does not allow this one to break out right now or if it tries and fails again do keep it on your radar screen. More good Q's to come and it is sure to get caught up in the hype surrounding the olympics in China next year. Their batteries will power the exciting electric garbage trucks which will service the games. The news of that contract is what attracted me to the stock in March..... actually the volume attracted me and then I saw the news. So keep an eye on it even if it does not break out this week.

Full Disclosure: I own tons of this as well. Go ABAT!

What do we know?

We know....
1. We are in a correction (don't call bottoms, test the lows)
2. We are testing the lows
3. Fear is EXTREME to say the least as measured by sentiment indicators..... and as measured by preventive action taken by me Tuesday to move money out of money market funds for fear the financial system is about to collapse! I have certainly never acted like that before! So take that as a sign of capitulation if you wish. Hey, maybe it is a rash move but in an uninsured account that is 20+% collateralized by mortgage debt and in CFC commercial paper.... no thank you.

So except for my actions which I just told you about everyone in the world can see these things, everyone knows "this is where bottoms are formed." You have probably heard that 100 times already. Everyone can see on the chart the way the correction in the $SPX played out in March.... the candle that put in the test low/double bottom and expects the same thing to happen Wednesday due to the factors above. That is easy to see and something you should be familiar with. Equal lows are very simple. So I just want to point out in the $RUT chart how a test can happen without precisely equal lows. Unlike the $SPX, the $RUT which started this correction showing relative weakness actually showed relative strength in the bounce last week. Therefore it is not yet pushing the extreme low as of yet. I have drawn in a line off the March low which if it does prove to be support DOES qualify as a test of the low to me. So if we do get early weakness and then a reversal I will not be harping about the $RUT needing to test its low. If the $SPX was in the same position, it would be just as valid there. This is actually a very commonplace setup where an outlier is left on the chart so always check for that other support level. The $RUT does not have to go all the way to that low if it does not want to. In fact, if it wanted to rise right from here that would be good enough for me as well.

Tuesday was a good example of why it is so important to me NOT to call bottoms or think the market HAS to bottom because of sentiment indicators but to just assume the correction will continue until it does not which will be shown to us clearly in price. How many people bought the last couple of days for those reasons? Now they are experiencing failed breakouts and continued downtrends breaking to new lows and severe regret at their emotional actions. To me it is just a fruitless exercise. These things are reasons to prepare for what you will do when the reversal comes, be it exiting bearish plays or entering bullish ones but leaving the creation of the reversal to the market itself keeps you out of the grinder against the trend and emotionally ready to act when the time comes. Money you don't lose stupidly is money you don't have to make back! Once the reversal comes everyone will say they called the low, what they won't tell you is they bought early got stopped out and missed the reversal rally. If we don't bounce here and plunge to the next levels of support such as the 200 day on the DJIA there will also be reasons they knew it would not be the low and stayed short. Amazing how everyone is always right.

So the assumption continues to be the correction will continue until it doesn't. Have one eye open for the potential of the classic reversal here.

Enough of this rambling? You get the point... go with the flow. It is very important to me as from the failed attempts at trading I have witnessed from friends, the cause is always giving up (breaking my rule #2) after letting losers run (breaking rule #1). Being out of the way of declines is much more important to me than even profiting off of them.... and there is certianly no way to profit from a decline before you know how to get and stay out of the way in the first place. Ok, Ok.... I'll get to some picks and trade management next. Feel free to chime in and share your thoughts or ask me to look at something.

How I See the Market During a Correction: Where we have been, Where we are

To make sense of where we are now it is necessary to backtrack a bit. There is no place to start but at the recent multi year or all time highs for the indexes. July 12 seems like a lifetime ago now, a HUGE rally pushes the indexes out to new highs and all is right with the world. Yes, there were warnings signs a correction was pending. I will take pride writing this blog in real time so I mention these things now just as recap. Real time is what it is all about... everything else is theoretical garbage. You will see them again and anything else needed in the future in real time with further explanation.

First and foremost the NYSE Advance/Decline line ($NYAD) failed to confirm the new high in the indexes. As the name states this line shows the cumulative total of the advancers vs. decliners. This is by far the best indicator of the health of the market I have ever seen. It has never been wrong in my experience with it and was not wrong this time.


The small cap $RUT failed to confirm the breakout, but more importantly the equal weighted S&P 500 as measured by RSP, an ETF, also failed to confirm the new high in its benchmark cap weighted sibling.

The Yen which is a liquidity driver of the markets was setting up for a countertrend rally through its 50 day MA and we had clear leadership to the downside developing in financials and consumer discretionary stocks which failed to move to a new high after the February swoon.
All this was nice to see but the trend is you friend right? Can't fight that trend so there was nothing to be but bullish at the top even as you recognize the warning signs. To be anything else is asking for it as these divergences can fix themselves or perpetuate longer than you think.

On July 24 the $SPX failed its breakout and the $RUT was killed off its non-confirming highs. This was the first confirmation of the warning signs and signal that action needed to be taken. On July 26 the DJIA followed suit and left no doubt that a correction was at hand.

There are two things that are important to me in once it is recognized we are in a correction.....

1. Trying to call a bottom is futile. Leave that to the idiots who will call a bottom every day and on any bounce claim victory and then call another bottom on new lows and claim victory again on a bounce. These people are jokes and you are too if you play this game. This can show up in a couple of ways. One way is obvious.... Outright calls of a bottom due to sentiment indicators , "vibes" that we have "gone down too much" or valuations. Just don't do that. Recognize things like sentiment indicators but realize they don't REALLY mean anything unless price confirms them, just like the $NYAD suggesting a false breakout did not really mean anything until price broke down. The other way is more subtle and needs to be constantly worked on even by experienced traders.... that is the maintenance of a bullish look at the charts even though the bearish setups, trends and confirmations are all around. In this way you can accept the market is falling, not try to call a bottom in the market, but still only look at support to hold as if it means anything until the market stops going down. This would be that sinking feeling in your stomach and confusion in your mind about whether to take a trade. Deep down you know you are looking on the wrong side of the market but are not fully conscious of it. This one is hard but is worth recognizing and working on.

2. More importantly... Wherever the market does find a low, it will be tested again in the near future before a real uptrend can resume. The lows, wherever they may be put in, will be tested! We don't know if a test of wherever the lows are put in would hold. In a continued bull market it would play out like the summer of 2006 or March 2007... test of the lows is successful and then move to higher highs. In a bear market or (prolonged rolling correction like 2004) the process of testing the lows fails again and again and new lows are created which are tested but fail to new lows.... cycle continues with big bear market rallies in between until the bear market finally ends. So what we know after we identify we are in a correction and not a natural pullback in an uptrend, is that the first rally off of a low, will NOT be the bottom that leads to a huge rally. It may ultimately be THE bottom, but that can not be known and we know a test of the bottom will occur in some way.

The working assumption is that we are in a correction. This will continue until the market PROVES otherwise. Holding the test of the lows is a signal of stabilization but the end of a correction is not PROVED until a series of higher highs and higher lows is in place. This can be a slow process even as the volatility makes it seem like things are happening quickly. Recognizing the current status of this process of testing, failing, holding, stabilizing, and trending should be enough to be on the right side whether a bear market develops or the bull market continues.

So..... where are we? Indeed, we are in the process of testing, perhaps failing at the the lows. Keeping in mind that lows need to be tested in a correction and calling a bottom is futile, this should not come as a shock. Friday saw us push down to the lows and hold, with no follow through to the attempt we are now right back down at the lows today. The working assumption remains a correction until the market proves otherwise and there has yet to be any real bullish case based on price action! The devastation you can see on the $NYAD chart above suggests that this will not be a walk in the park like the Feb/March correction but will be more prolonged. No doubt the market can rise strongly at any moment but the assumption has to remain a correction until the emergence of higher high and higher lows. Wanting to act bullishly BEFORE a confirmed bounce off support and after such a bounce feeling like you already missed the move is an expression of the subtle way of trying to call a bottom. The first exposes your money to the horrors of a correction and the second puts you in an emotional spiral that can make you fail to act on the next trend still fearing the market (Yes, I am speaking from experience!). When it happens it will show us clearly that it has happened. Don't try to call in it in any form! I have marked in yellow the confirmed bounce at a successful test of the lows March 14-15 and the higher high after a higher low April 3-10 on this chart of the $SPX during the Feb/March correction. Was there any need to call the bottom and did you miss anything by waiting for confirmation? Yes, that was a very easy correction to hold through, andcame on a bit too quickly to play on the downside, but it works all the same no matter how the correction plays out.

OK.... that is enough for now. Now that the groundwork is out there I will move to closer examination of technical evidence in the chart in future posts and what I see as actions that can be taken in the different steps in the process depending on the timeframe of a trade. This is the first potential market top/entry into a bear market I have traded through and I have to say it is bringing many things full circle! Needless to say my posture remains bearish until evidence arrives to prove a change is needed.

SWEB earnings Wednesday at 3pm

Stockgroup Information Systems Inc., SWEB, was very good to me earlier in the year. I have followed this company for many years and held some shares in the dregs of the portfolio to make sure I would keep an eye on it. It remains the only penny stock company I have ever seen that said they were going to do a share buyback at .35 and actually did it!! Who knew there is some honesty down at those price levels? The real action began in January with the announcement of an acquisition, the release of new product and the coming improvement of the old. If you are interested you can look at the news on their web site here for more info.

As word of the increase in the potential of the company spread a nice run from .40 to $1.45 happened earlier in the year. Q1 was reported in May, the first partial quarter after the acquisition and there were some disappointments as the company struggles to manage its new growth. Many of these issues were addressed via press releases issued since the last conference call. This being the case, we can see in the chart it is expressed with a trading range as investors await the next earnings announcement Wednesday at 3pm and conference call after the close. This is a weekly view... the runup followed by the range as we wait to see if the company is going to get to the next level.



I would never make an assumption about what will happen on this call, but if the company shows all is on track and they are catching up with their own growth a bit better, some new hires in the last Q should have helped with this, then the stock is extremely undervalued at $1.03 with a market cap of just over $40 million on what will be $15-$18 million in sales for 2007. Priced at 3-4 times 2007 sales the company should be trading $1.30-$1.70, if the market starts pricing in 2008 with further visibility given from the earnings call, the range expands higher. Similar companies have been bought out for 7x's sales in the past so there is plenty of room for valuation expansion if the market so desires. These are only thoughts though and price is king, we can only use the chart to manage actions upon the stock, so what I am saying is if all goes well and the stock breaks out there is a trade here that could take the stock up near $2. The chart shows buy points breaking resistance at $1.30 and/or $1.45 with volume. Multi-year resistance kicks in from 2000 at $1.50, $2.10 and $2.81 respectively. Of these $1.50 can be considered a buy point if it is broken while $2.10 (or really the round number of $2 as it approaches) can be considered a short/intermediate term sell target. A quick move toward the $1.70 2007 valuation band also presents a possible short term target depending on how it gets there.

With the announcement of solid results, this is an easy trade to take. I will post on the numbers when they come out and the conference call after the close. The company could easily show they have no idea what they are doing and don't know how to reach the goals they have set.... but the point is to be prepared! Now we are prepared to take advantage of this situation if it develops.

Full Disclosure: I own many shares of this company and will hold everything I have into the earnings release. If you decide to buy before or after the release the decision risk is all yours!! I fully understand holding shares into this release can CRUSH my positon... do you?

Why not post a trade?

WRLS: Nice huge volume breakout coming in for a test. Looking to buy a daily higher high on this, so over $5.34, confirmation would be on the close but I will take it intraday. Stop $4.92.

Intermedaite term trade with first target of $8.50. Will also take short term position with a target sell around $6 depending on the action.

Beyond time to get this started and VIX anomaly

OK... just because I'm about to travel and attend trading workshops for the next few weeks, might as well make the first post.

While this blog will eventually be about "seeing the trade" for now I will just begin with some market commentary and observations and maybe a few random trades. Just so you know I am not about "calling" market movement. I am about recognizing the situation and being prepared to act no matter what happens. So don't be disappointed when it seems like I am trying to have it both ways or all ways... the point is not to be right, but to be ready. As Rule #8 in the corner down there states... Trade the present. "Know the future" is not a trading rule.

So here is my first observation from over the weekend....

There is a historical anomaly in the VIX and SPX relationship. The move in late July was totally normal with the SPX breaking support while the VIX spiked out to new highs. But the action Thursday and Friday in the VIX has no precedence (at least in the data we have available). Historically only a breaking of support (and plunge) in the SPX accompanies such a move to new highs in the VIX. This time the VIX stands alone.... obviously this was caused by the crushing volume and willingness to pay large premiums in the SPX puts despite the fact the SPX had not broken support.

So what goes on here?
1. Just part of the repricing of risk going on?
2. A prelude to a crash/break of support?
3. Crushing FEAR without a basis in reality (lower prices) like never before? VIX divergence that fears are way overblown and a buying opportunity is at hand?

With no historic precedence a very interesting situation. It is kind of funny that the market has barely even fallen yet the Fed is injecting liquidity and folks are already jumping off buildings. It is early in the morning and I can see the futures are up nicely so I guess that leans us toward #3 at least for now. We may have to revisit this later in the year.

If anyone has seen this discussed anywhere please provide a link as I'd like to see.

It will take a few posts to get into the flow of the market commentary so I will not attempt to begin here except to say the market is at support.... but you knew that right? A confirming bounce buys the market some time to begin the healing process opens some short term continuation or countertrend plays. Keep in mind that failed bullish candles at support present new low risk opportunities to enter on the downside.... a concept to be discussed at a later date.

Hope you will participate and we can make some $$$ together.