Archived Blog

Posted January 26, 2011 at 6:52 PM

As traders, we are always searching for signals of market direction.
Moving averages, candlesticks, bollinger bands, etc.  Although an
overextended market can continue its direction for some time, there
are clues to reversals.  One such clue is the market appetite for puts
as measured by the VIX.

The CBOE Volatility Index (VIX) is a key measure of market
expectations of near-term volatility conveyed by S&P 500 stock index
option prices. The VIX is widely considered to be the world's premier
barometer of investor sentiment and market volatility.

So, could the VIX give us clues as to major market moves?  Well,
options prices are set by market makers.  Market Makers generally will
take a trade and immediately hedge that trade in any number of ways.
They make their money through the bid/ask spreads and like a bookie,
will raise or lower odds (prices) based upon the activity.  The VIX
has an inverse relationship to the S&P as it is essentially a "fear
gauge.  Put purchases on the S&P increase the IV of the VIX and make
options cost more expensive because of this demand.  Its logical to
assume that when the IV of the VIX options increass, market makers are
getting a lot of put orders, laying off their bets by hedging and
making the options more expensive to purchase.

At this writing, the Feb. at the money calls have an implied
volatility (IV) of 107 and the Mar at the money calls have an IV of
146.  Subsequent months IV differential ranges from 2 to 10 points so
a 39 point difference from month to month is worth noting.  The value
of the calls will increase in the event of a market correction so this
is telling me that the market makers are expecting a correction
between the Feb and Mar options expiration cycle.

Be careful out there.

Jay

Posted January 26, 2011 at 6:45 PM

He was a fine southern gentleman wearing a slightly rumpled light blue suit as he stepped off the train
after a three day trip from New Orleans. I was 10 years old and the anticipation of seeing my granddad
was like Christmas morning. Granddad liked to smoke cigars and to this day when I smell cigar smoke
it brings back memories, wonderful memories of his annual summer visits to my brothers and me in
Southern California. He would always have a crisp $1 bill for each of us and I couldn’t wait to visit the
Magic Shop on the Boulevard to buy a magic trick.

Granddad booked accommodations at the Las Palmas Hotel just off of Hollywood Boulevard which
was at the time a very friendly warm environment that welcomed his visits. I always wondered why
he didn’t stay with us in Santa Monica, but I came to realize that he liked Johnny’s Steak House on the
Boulevard and the checker games that he could engage in at the Hotel. Granddad was the Louisiana
State Checker Champion and a charter member of the Paul Morphy Chess club in New Orleans. Until his
death in his 90s he was as sharp as a tack and played the game almost daily.

We would take the 45 minute drive from Santa Monica to Hollywood and visit him and I always looked
forward to challenging him in a spirited game of checkers. Checkers to some seems like a watered
down version of chess, but that’s not the case. It is a very brainy game that requires great strategy and
recognition of patterns. He was a master of the game and it was a thrill to have an opportunity to play
checkers with him. I can still hear his southern drawl saying “That was a fine move my boy” as I opened
the game. It wasn’t but a few moves later when he would say “Well my boy, you just lost the game.”
I said “Granddad, there are still men on the board, how can the game be over?” You see, he had the
ability to recognize the seemingly endless number of outcomes from the position of the pieces on the
board. He was at least ten moves ahead of me.

Trading has become my game of checkers. This game can also be mastered. Like checkers or chess, it
takes vision, the ability to adjust to the challenges when being attacked, recognition of certain patterns
and the ability to execute strategies. It is so funny how life comes full circle and here I am doing what
my Granddad taught me to do, using my mind, exercising patience and looking for the opportunities to
win in the market. See the opening, employ the appropriate strategy to optimize the situation and if it
changes then adjust.

Thanks Granddad Espy, you made all the difference.

Mark

Posted January 9, 2011 at 1:46 PM

I recently read an article from Dan Ferris and he had some interesting statistics about the current valuation of the stock market.

From a contrarian point of view, excessive optimism and speculation produces excessive, dangerous valuations.  If you were to measure the valuation of current market based upon price/earnings (P/E) ratios, dividend yields, and the ratio of the stock market to GDP. All three point to excessive valuation of the overwhelming majority of stocks.
 
The U.S. stock market is trading at around 18 times earnings. That means the average U.S. stock portfolio bought today might double your money in 18 years.  Stocks are yielding about 1.85%. Dividends on a basket of U.S. stocks bought today will pay back your initial investment in 54 years.
 
He also uses on of Warren Buffett's favorite indicators. The U.S.'s GDP is about $14.75 trillion. The Wilshire 5000 index contains about 98% of U.S. stocks by market cap. If you add the missing 2% to the Wilshire, the U.S. market is worth about $14.9 trillion.
 
So the U.S. stock market is now priced higher than the entire output of the U.S. economy. That's like saying the entire U.S. economy consists of nothing but a few thousand publicly traded companies. Stocks aren't truly undervalued until the market is around 80%-85% of GDP. At 100%-plus, they're absurdly expensive.

Posted January 8, 2011 at 9:47 PM

Are we at the tail end of the biggest dead cat bounce in decades?

There sure is a lot of bullishness out there for a market that has been essentially sideways for 2010.  Are we at the tail end of the biggest dead cat bounce in decades or is the new normal of massive deficit spending, criminal government policies, and bankrupt state and local government the way to prosperity?

Well, the market has been on a tear since late 2009.  More than a few have been against the recovery and lost.  Those with a buy and hold/hope strategy has worked just fine..... provided you didn't make that investment between the late 90's and the end of 2008. 

How long will this recovery continue? Does the relentless decline in the dollar point to a continuing increase in stock prices and your best strategy is to buy on the dips?

The most hard fought lesson that traders learn is to "trade what you see".  If the market is moving up....buy it, but have a plan for selling.  If the market is moving down...short it, but have a plan for buying.  It's a trader's market.

We are in the Bermuda Triangle economy.  Good news is bad news and bad news is good.  Your broker, Cramer, CNBC, and your government all have an agenda.  It's not necessarily for you to prosper.

Trade what you see.....and have a plan for the reversal.

Posted January 7, 2011 at 12:22 PM

Posted November 25, 2010 at 11:27 AM

What do you get when you combine multiple sentiment indicators to produce one sentiment poll? 

Answer:  The NDR Sentiment Poll!

Historical data from 1995-2010 using NDR Sentiment poll figures shows that when the index is above 61.5, the S&P 500 annual gain drops into the red, -0.7%.

Between 55.5 and 61.5, annual gains of 5.1% on average are seen while below 55.5 the average gains are 9.5%.

At what level is the NDR Sentiment Poll index now?  As of just a few days ago, it was at 69%, suggesting a high degree of caution is warranted at this piont in time.

Since 2007, the five times the index has reaches this level or above, a market correction has shortly thereafter ensued. 

However, back in 2005 this sentiment reading did not lead to a market decline of any note soon after and indeed the market kept forging ahead. 

More often than not, market corrections have taken place and we think it's only prudent to consider increased hedging at this time as a result. 

Posted November 5, 2010 at 6:17 PM

Executive Summary from Mark Espy

Fundamental events, as indicated last week in my analysis, had the potential to drive the market bullishly to test the April highs and that is exactly what happened.  We are slightly above resistance and I feel the next move is to retrace to test old resistance which has now become new support.  If we bounce we could be on for a more sustained bullish run.  If support doesn't hold, we will move back into a channel and trade there for awhile.  It is likely that the markets will languish a bit as the move on Thursday resulting from the QE2 announcement moved the indexes outside of the upper Bollinger Band. When that happens almost always price action slows or retraces.  I feel that it is now more likely that we will get a bounce and move higher after a short term pullback to retest the aforementioned support.

Posted October 31, 2010 at 10:00 PM

In his most recent speech in Rhode Island, Bernanke delivered an extraordinarily shocking warning to citizens and policy makers.

He notes "projections by the CBO and others show future budget deficits and debts rising indefinitely" while "unsustainable trajectories of deficits and debts will never actually transpire, because creditors would never be willing to lend to a country in which the fiscal debt relative to the national income is rising without limit".

But that's not the shocking part.  We knew that already.  The more shocking part of the statement read as follows"

"...fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point. The only real question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people plenty of time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis"

In no uncertain terms, Bernanke is telling us that the unsustainable debt crisis will be resolved, either by a shocking discontinuity or though a slower, planned process.  The latter will most likely impact entitlement programs, such as social security and medicare, and will also produce higher taxes.  A discontinuity could produce Argentina-style calamity.

He goes on to highlight that "history makes clear that countries that continually spend beyond their means suffer slower growth in incomes and living standards and are prone to greater economic and financial instability."

His code red warning continues as he warns "The budgetary position of the federal government has deteriorated substantially during the past two fiscal years, with the budget deficit averaging 9-1/2 percent of national income during that time" and critically "as the national debt grows, so will the associated interest payments, which in turn will lead to further increases in projected deficits"

And Bernanke continues to warn of the dangers when he states that  "Failing to address our unsustainable fiscal situation exposes our country to serious economic costs and risks. In the short run, as I have noted, concerns and uncertainty about exploding future deficits could make households, businesses, and investors more cautious about spending, capital investment, and hiring. In the longer term, a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity, and economic growth"

Finally, he directs his attention to those in power and implores that they act before it is too late:  "What we do know, however, is that the threat to our economy is real and growing, which should be sufficient reason for fiscal policymakers to put in place a credible plan for bringing deficits down to sustainable levels over the medium term"

Posted October 31, 2010 at 9:59 PM

While every other analyst is talking about Apple, we'll use the distraction to scout other opportunities.  One opportunity that many thought would never see the light of day is the 'marijuana bond'.  That's right, with the passing of proposition 19 in California, the state could potentially issue 'marijuana bonds' backed by tax revenue.  According to some estimates, the industry could yield as much as $1.2 billion for California.  But the real question is how is it possible to make money from the passing of proposition 19 and the potential introduction of the 'marijuana bond'.

To start with, we must perform a competitive analysis.  Which industries and products may be detrimentally impacted by the legalization of pot?  An obvious first victim will be prescription pill producers of products, such as Prozac.   As patients migrate from the prescription anti-depressant, demand for Prozac may diminish, which would in turn hurt revenues of companies like Eli Lilly (ELY).   A proclivity towards marijuana as a relaxant over and above other traditional forms, such as alcohol, may take place, which would in turn impact alcohol demand, think BUD.

On the flipside, it wouldn't take much for tobacco companies to capitalize on the new trend by producing marijuana cigarettes.  Companies like Philip Morris (MO) and RJ Reynolds (RJR) would be prime candidates for bullish long positions. 

Ahead of the Novemeber 2 statewide ballot, a potential speculative play could include a combination of call options on the cigarette stocks and put options on the pharmaceutical and alcohol stocks.  Of course, if you went all in expecting a pass then it's possible every bet could go wrong in a hurry!  But that's why regulatory plays like this one are so speculative in the first place.  Nobody knows with full certainty the outcome ahead of time and so a hedged approach is to to simply buy calls across the board in expectation that the stocks that get a boost from the outcome will move further than the losses incurred on the stocks that fail to move or decline subsequently.  Or more accurately, the profits from the winning long call options will offset the losses from the losing call options. 

Perhaps, it's best to sign off by emphasizing that this is a purely speculative play and, as always, is intended for educational purposes only.  Please contact your financial advisor for specific advice as to the suitability of any position.  Of course, you can paper trade to your heart's delight!

Posted October 31, 2010 at 9:56 PM

Submitted by:
Steve & Kimber Anderson, www.MarketTamer.com members and winners of 1 month FREE membership at www.MarketTamer.com for November for outstanding contribution to the Market Tamer community.

Paying for that Cadillac priced education certainly has had its place, but for options strategies we always come back to Market Tamer principles and philosophies.
 
We are quite pleased to see more Advanced Technical Analysis (ATA) like this new paper (http://www.markettamer.com/ImproveYourMarketTiming.pdf) in candlestick analysis.  I would like to pass along some ideas coming from other ATA classes and workshops which I think other Market Tamer students would benefit from.  I am most interested in helping to prevent possible confusion in students with different levels of education.  Students often like to have absolutes and the market rarely offers them in reality.
 
This was, perhaps, our greatest failing in the last year or so.  Due to circumstances beyond our control we missed much of February to May this year, and in trying to get caught up we allowed ourselves to get over leveraged in early April.  While we recognized a trend change, we found ourselves confused listening to conflicting signals from different educators we follow.  I am not placing the value of one opinion above another here, I am emphasizing the importance of making clear for students what is being discussed in a paper or presentation.  One educator in particular from another company did make clear in May that the trend changes were taking place, but for the sake of a few students perhaps not as advanced as others would could benefit from ATA, he focused on a few stocks continuing strong up trends even as the market rolled over.  Many students found this confusing, talking for hours about bullish trades in an ATA class while the trends of the market are turning down – first short term, then longer term trends clearly changing, yet only bullish trade setups on bullish stocks…
 
It is our fault that we allowed our decision process to be clouded by this confusion.  Had we simply followed our rules more religiously we would have done better; but we adjusted instead of exiting, levering up risk we should have been removing.  This has made us particularly conscious of how educational materials and presentations may needlessly confuse students when the materials are not very clearly identified for their best benefit.
 
Some people know the names of all the constellations in the night sky, what good does it do them?
 
Every price pattern, or candle pattern, is nothing but the playing out of trend, support and resistance, and momentum.  While some people find knowing the names of patterns important, in reality the names are little more than ‘cocktail party talking points.’  What is more important is the students ability to identify support and resistance, far more important than names.
 
For example:  I have found many students, and often so-called experts, can identify a ‘head and shoulders’ pattern and blind themselves to what is really happening.  In recent years, most of the time this is a mis-identification of a sideways trend or intermediate term price consolidation, and often plays out as the continuation of the previous longer term trend.  Once anyone starts to put a name to some price action, they are likely to begin to ‘expect’ it to play out a certain way, they are caught off guard when it does not play out as expected.  The same is true of double tops and bottoms and many other common patterns.  Instructors should use the word ‘potential’ when identifying a pattern that has not yet played out.  A sideways market, like we have had for the last year or so, causes lots of ‘potential’ patterns to play out which fail because they are just support and resistance playing out in a sideways market.
 
Candles are the best indicator of short-term momentum, and are best applied to the short-term trend.  It is true that any trend reversal begins with a reversal in the shorter term trend, but candles are best applied when considering the next few candles, not weeks or months in advance.  For example, in the first point of the first segment Mark says “…if a reversal pattern appears, you must have a trend to reverse…” and goes on to say that a reversal pattern means nothing in a sideways or non-trending market.
 
I think it is very important when introducing concepts like this to avoid confusing students, and emphasizing the length of a trend is important.  Any intermediate term sideways trend has short term up and down trends, each of these short-term trends is usually marked with some kind of reversal pattern, which is not at all meaningless.  It is also quite normal for a sideways trend to extend its bounds without significantly changing the longer term trend, which makes trading breakouts in a sideways market particularly risky.
 
For example, boiling down our ATA education from several sources I would describe our decision process as:
1)      Intermediate Trend (weeks to months) is about 50% of our decision weight.  It is always most likely for the longer term trend to resume after a price fluctuation of some kind.  It is the responsibility of the ATA student to be aware of the difference between a price fluctuation and a trend change.  Price fluctuations do not always result in a trend change.  I have observed many students in every different forum who can identify a potential trend change and exit profitable trades without waiting for confirmation.  This is where application of strategies like the collar to hedge a running trade may be better than simply exiting a trade.  Ie:  “Don’t turn an investment into a trade.”
2)      Support and Resistance is about 30% of our decision weight.  When the short term trend presses through one price level of support or resistance the price action will move to the next level of support or resistance.  There is nothing magical here, if the intermediate term trend is more sideways then the short term trend will have less strength to break through price levels.  This is where candle patterns really help with identification of short term momentum changes at critical price levels.
3)      Momentum is about 15% of our decision weight.  The ATA student must be aware of how much conviction seems to be behind the short term trend as price fluctuates.  Oscillators help to identify momentum on a longer time scale, but Candles are the best indicator of short-term momentum.
 
The other 5% goes to volume, news, and other less solid technical indications.
 
So, putting this together, for our purposes, candles make up about 15% of our decision, which depends more on support and resistance which are identified by longer term price action, and the previous longer term trend.  My concern in a paper like this one is that a student who targets more intermediate term trades, like we do, may begin to focus on a shorter time frame without understanding how it may affect their trades.
 
What I have found to be the most difficult, and observed this of others, too, is keeping in mind the short, intermediate, and long term trends, and knowing which trend your trade is taking advantage of.  This is made more difficult by interpretation:  Some see a flag as a short term trend change while others see it as a price fluctuation, so in speaking to students with different time frames in mind it is important to make clear which time frame you are addressing.
 
Bearing all these things in mind, we very much like the new material.  But candle patterns should be said to indicate Potential reversals to be most accurate.  Short Term trend changes are in the eyes of the beholder, depending on the timeframe they are watching and experience.  You are trying to serve a wide variety of students with different strengths and weaknesses, all of which must be served in some way.
 
While candles work well on the scale of ticks to months, it is important to realize that the momentum reflected is immediate on that time scale and will only tend to predict the next few candles on that time frame – for example, a Bearish Engulfing pattern may be the first candle in a flag lasting 2 days, or a major trend reversal; and a student must be prepared for either outcome (or any other) by planning their trades for any potential outcome.

Posted September 4, 2010 at 12:09 PM

Posted August 28, 2010 at 1:18 PM

Posted August 21, 2010 at 3:11 AM

Posted August 7, 2010 at 4:11 AM

Posted July 31, 2010 at 1:19 AM

Posted July 24, 2010 at 12:46 AM

Posted July 17, 2010 at 3:51 AM

Posted July 10, 2010 at 2:58 AM

Posted July 5, 2010 at 9:24 PM

Posted June 29, 2010 at 12:15 AM

·  The Inverted Hammer is a single session reversal pattern.

·  The Inverted Hammer appears at the bottom of a downtrend and is the inverse of a Hanging Man pattern which is located at the top of a trend.

·  The upper wick is ideally at least twice the length of the real body with little or no wick to the bottom.

·  The pattern is slightly more bullish if the real body is white as opposed to dark.

·  A gap down into the Inverted hammer increases the strength of the signal.

·  Many times you will see the Inverted Hammer associated and combined with other candles such as a Hammer and/or a Doji that will confirm and strengthen the reversal.

·  The relatively long wick to the upside begins to indicate to the bears that buying pressure is stepping in.

·  The bears will heed the notice and begin to cover their short positions even though they won the battle temporarily by pushing the stock lower.

·  The pattern is validated by a gap up to a bullish follow though session and is further fueled by more short covering.

·  Increased volume on the reversal day is also an indication the stock will be changing direction.