Friday, July 9, 2010

“A Major, MAJOR bottom”?

– Posted in: Links Rick's Picks

No sooner had we finished reading a breathless note from our friend Chuck Cohen -- "Major, MAJOR bottom here" -- than we received an e-mail from Jonathan Auerbach at Auerbach & Grayson saying more or less the same thing. Each notes that bullish sentiment as recorded by AAII, a contrary indicator, is about as low as it gets.  While I greatly respect both of these guys, and although I think stocks are going higher over the near term, I remain skeptical that we are witnessing the start of a major bear rally. To access the A&G report -- a fascinating read, as always -- click here.  I will post Chuck's essay as commentary over the weekend.

Bear-Powered Rallies

– Posted in: Rick's Picks

I was only half-kidding in today's commentary about DaBoyz' perpetual motion machine, since they appear to have trapped bears but good this time. Slightly more than half of the losses since June 21 have been recouped in just three days, attesting to the vicious power of this short-squeeze.  This is bearish action, for sure, but that could be scant comfort to those who elected to stay short when the closing bell sounded on Thursday.

SIU10 – September Silver (Last:17.955)

– Posted in: Current Touts Free Rick's Picks

Here's Silver, trading exactly where it was in early January. That should temper our expectations for the moment, although it should be noted that an impulsive dip below 17.150 would not exactly be a sign of good health. More immediately, there remains the prospect of a test of trendline support that comes in today near 17.350. Alternatively, it would take an upthrust to at least 18.185 to stir up a mote of bullish enthusiasm.  That's a tick above a look-to-the-left peak that doesn't even exist until one zooms down to the 10-minute bars or less.

GCQ10 – August Gold (Last:1211.60)

– Posted in: Current Touts Free Rick's Picks

You know the drill by now: a push to at least 1222.90 is needed to suggest that bulls are doing more than merely breathing. In the meantime, the 1162.30 correction target is sill viable. Night owls can look for bull camouflage in the pattern shown. If it develops as such, affording an opportunity to get long at 'X', no more than a few ticks should be risked, and partial profits should be taken at 'p' if the position contains more than a single contract. _______ UPDATE (11:57 a.m. EDT):  The trade shown in the chart triggered, but the ensuing rally died at the Hidden Pivot midpoint.  The trade therefore would have been a small winner, or a scratch at worst, but it wasn't until the futures had noodled around for another six hours that they took off in earnest, rallying $20 from the evening/overnight lows. This took them as high today as 1214.10 -- not quite sufficient yet to celebrate.

ESU10 – September E-Mini S&P (Last:1065.50)

– Posted in: Current Touts Free Rick's Picks

It's difficult to imagine that yesterday's price action will turn out to have been distribution, so we'll assume the futures are going higher into week's end. The Dark Arts of Hidden Pivotry suggest 1105.50 is possible, but we should also pay heed to the 0.618 Fibo line. Relative to the selloff from the summer solstice high, it comes in at 1081.25 and seems like a logical minimum upside target now that the 50% line at 1066.25 has been breached. Alternatively, if the futures should astonish and delight by collapsing, a midpoint support at 1030.50 will be in play provided 1068.50 has not been exceeded first.

DIA – Diamonds (Last:101.92)

– Posted in: Current Touts Free Rick's Picks

With bears struggling to hold stocks down yesterday, we temporarily neutralized our short position just before stocks took off, selling two August 102 puts for 3.70 against six August 98 puts already held for an average 2.13.  This is a "backspread" position, and it will automatically make us longer if DIA goes up and shorter if DIA goes down. The tradeoff is that time decay will work against us, and that the position is a loser at expiration if the underlying vehicle is sitting near 98.  We have plenty of time to adjust, though, and the adjustment that will work best implies selling into strength and buying into weakness. For now, however, do nothing further. Wait till you see how much fun this can be if the Diamonds should turn violent! _______ UPDATE (2:48 p.m. EDT):  Short one more August 102 put for 3.10 or better. They are currently 3.10 bid with DIA trading 101.68. The resulting backspread -- long six August 98 puts, short three August 102 puts -- leaves us net short the equivalent of 24 shares, but we will automatically become long if DIA moves up just 20 or so cents from here. Our average cost per ratio spread is 76 cents (3.50 average per each August 102 versus 2.13 x 2 cost for the August 98s). This position will have to be worked to overcome the disadvantage of time decay and the prospect of a worst-case loss if the options expire with DIA trading around 98. One way to do this would be to short August 94 puts if DIA falls sometime in the next few weeks.  That would turn our vertical ratio spread into a butterfly yielding a profit, or at least no loss, over a wide price range. If DIA simply goes up, up, up, then our

Stocks Defy Gravity by Playing Catch-Up

– Posted in: Commentary for the Week of March 8 Free

Stocks extended their rally for a third consecutive day, with computer-driven buying accounting for nearly all of the gains.  How do we know this? Why, we read it in the Wall Street Journal:  “This is a big vacation week,” noted one equity-desk veteran,” but the computers and servers are still cranking them out.”  We assume that “cranking them out” means generating buy and sell orders irrespective of human participation or volition. Sort of like what happens when the Ferris wheel operator disappears for 15 minutes with a flask and a gal in a polka-dot dress. The Journal cited another catalyst as well: a frenzy of trading in the final 30 minutes by exchange-traded funds (ETFs) playing catch-up. This supposedly has been going on since June, and one wonders whether the Masters of the Universe have finally devised a bullish perpetual-motion machine. Think about it: DaBoyz move electronically traded index futures higher overnight on extremely thin volume, requiring U.S. stocks to play catch-up on the opening bell. This is usually accomplished by way of a gap-up opening that causes the Dow Industrials to leap a hundred points or more before anyone has had a chance to buy anything.  Then stocks noodle around for the next five hours before taking yet another leap as the ETFs bring their holdings into line with all of the new buying that has taken place. Then rinse and repeat. No wonder some forecasters are predicting the Dow Average will eventually top 30,000 – presumably, even if the U.S. sinks into a Second Great Depression. Kudlow's Helpers We have noted here half-jokingly that there is perhaps only one active buyer during the daily noodling-around period: CNBC’s irrepressible bull, Larry Kudlow.  In reality, most of the buying is done by bears covering short positions that have gone awry.