Monday, September 28, 2015

Bears On The Prowl - $MOS $APD $BP $APA $LNG $WYNN $X $AA

Bears On The Prowl

The market crash that we suffered on August 24th should have served as a wake up call.  After that session we headed into a bearish scenario that has lasted 6 to 8 weeks. 

The Bears are out and about and prowling the market for their next opportunity. This was very evident once the price of oil began to plummet 10 months ago and gas prices in US began to slide down below $2.00 a gallon. Savings from the drop in oil never increased consumer or capital expenditures by businesses. Wages in US and the rest of the world have stagnated so we are now in a deflationary environment.

The largest manufacturer of mining equipment $CAT has lost 33% of its stock value within the last 12 months. On Thursday it gapped down over 6% with 4 times the average daily volume. $CAT is only reacting to what they see in all the countries that they do business in. This was a confirmation that the market is headed for a very bearish outcome in the next couple of weeks.  This subject actually came up for discussion at a private event I co-hosted with a colleague on Saturday and it led to a great conversation on global demand.

Nobody Is Producing!

$CAT is a multinational company and they have been giving low guidance for several quarters now. They've projected those sentiments all the way out to 2016, so they're telling us something - if we're willing to listen. This is not a caterpillar story. They are reacting to what they see as a lack of demand for raw materials all over the world. Major miners have not been buying or placing orders for new equipment because there aren't enough buyers out there for the raw minerals that go into our products.  

There is also a lack of demand for steel and other metals that go into the building industry. This in turn leads to commodity countries such as Canada, Brazil, South Africa and Australia suffering a loss of revenue from the lack of exports of their mined material.  

My Market Outlook

We will be heading into the "Earnings Confessional" in two weeks when $AA reports its earnings. Second quarter earnings was a disappointment and the market reacted negatively last quarter. Some traders made money trading $NKE but its success should not be extrapolated to reflect as a health of the economy or the market. Currently the  "Market is in Correction" and I project the major indices may be headed considerably lower in the next couple of weeks. My target for the major indices are:

$SPY ... 185
$QQQ ... 90
$DJX ... 15,400

Currently all the major sectors are trading below the 200 DMA (daily moving average) That in itself is a sign of a very poor health of the market. Europe and Asia markets were down by 3% last week and that will have a dampening effect on our US markets. The worst performing sectors are:

$XLB (materials)
$XLI (Industrials)
$XLE (energy)

Some of the stocks that are worthy of pursuing a bearish Option trades are:


Most of them report their earnings in the last few days of October so if I'm planning a trade now, I'll be ready to harvest profit or cut my losses in week 3.

Happy Trading!

Monday, September 21, 2015


Low Risk Trading

Lately, I have been talking to quite a few traders and students that I mentor and most of them express to me that they lost money in their stock positions during the market correction on August 24th. Some of them have just given up because the market has been just trading sideways since March of this year. I often talk about "Low Risk Trades" but I have gone further by explicitly showing them what exactly a low risk trade looks like.

On Friday Sept 11th, I established a Virtual Trade on $ORLY for my students.  As this is not a good time to be taking a stock position and putting a lot of money at risk, I felt it was best to show them what a  low risk trade actually looks like.

$ORLY has been trading along its 8 day ema (exponential moving average) for the last 8 months and making a move of 7 points up on average per month. It is strongly supported by the institutions as well. Instead of buying 100 shares of this strong up trending growth stock and exposing $25,000 to market risk, I decided to buy at the money (ATM) 250 strike call option for October for a debit of $3.75 per contract. There was a trade plan in place to make a profit of 100% with a target for the stock to move from $245.85 to $252.85 in the next 15 sessions. Within 3 days of placing the Low Risk Option trade, the stock maintained its momentum and we closed out the position for a 100% return on our investment. The stock had moved less than 3% but our low risk trade made a 100% gain.

Opportunities Under Current Market Conditions

In my blog on June 1st, I was preparing my readers to stay in cash mostly and only approach the market with a low risk trade - stock or options - and harvest profits from their positionsMedia was frantically talking about Greece and Euro zone than. Now we are talking about China ... China ... China or Janet Yellen.

This week media will once again talk about elections in Greece or Russian troops and missiles in Syria. That is just market noise. I look at the data and it was just glaring at us for 2 years that we are headed for a major correction in the market world wide. It is good to look at the stock charts but one has to dig deeper and look at the performance of the commodities as well as world major currencies and etf's to get a clearer sentiment of the market.

Emerging markets such as China, India, Brazil, South Africa and Turkey depend on raw mining materials to produce things that the developed economies of US, Japan and Europe consume. Look at the weekly stock charts of the following mining and oil related companies for the last 4 years and you would think we are in recession already!

Mining companies


Oil Related companies


Some of these companies have lost 50% to 90% of their stock value since reaching their all time high. These were the signs that there is lack of demand from the developed countries of Europe, Japan and US.

Currently the worst segment of our US economy is retailing, energy related oil and gas, rail transports and chemicals. All this data is my confirmation that we are headed for a 5% correction in the next several weeks with 3 digit moves in the $DOW - up or down - with regularity.

It is Sunday evening as I am writing this blog and I am totally at ease and I know I will sleep well tonight. I hope my readers are mostly in cash and any positions they take will be a very low risk trade. Have your trade plans in place for profit, loss or time exits. That is one important lesson that we all learnt with my Virtual Trade on $ORLY this week.

Happy trading!

Monday, September 14, 2015

My Market Sentiments - September 14th 2015

Trade Plans

Traditionally, this is the time of the year when things look very gloomy in the market. The past 4 weeks were brutal. All the gains that we had made in the $SPY in the last 14 months were wiped out in just last 20 sessions. This is why it is critical to develop a very detailed and well thought out trade plan for any position you take.

These trade plans should always have specified profit, loss and time exit targets. Trade plans are your guide to setting up benchmarks for harvesting profits and increasing the size of your portfolio. One of the main components of the trade plan is planning for a loss exit. This is the part that a lot of traders overlook and have difficulty executing.

I find that it is best to set contingency orders with your broker.  Basically, when you make your initial stock purchase, set your order to include contingencies for the loss and timing exits you have pre-defined in your trade plan. This is how you avoid the kind of losses that a lot of traders lived through these last 4 weeks.

My Market Sentiment

Currently I am more bearish now and we may be headed for another 5% correction in the next 5 weeks. This sounds alarming but the data is very clear on this subject. I highlighted my reasonings in a blog post on May 13th with my take on 'economic PSTD'.  There are currently over 25 countries that have devalued their currencies to gain an economic advantage of lowering the cost of their exports. China isn't actually the source of the problem, it's the sheer lack of demand from developed countries causing these effects all over the world.

Emerging markets economies depend on exports of manufactured goods to the developed markets of Europe and America. They use the commodities like oil, metals, iron ore, coal and fertilizer components. There has been a dramatic drop in the demand of these commodities since 2013 which gives a lot of weight to this lack of demand argument.

The slide in the price of oil since June of 2014 is the latest example. There were plenty of warning signs in early 2013 when there was a dramatic drop in the the mining sector. Stocks like $GDX, $AUY, $ABX, $CLF, $FCX - to name a few - were dropping precipitously. Economic expansion depends on the use of commodities and when there is a lack of demand for them, it makes sense that the commodity countries will face a recession. Canada and Brazil are already in recession. Australia and South Africa are headed that way too.

Bearish Option Trades

75% of stocks trend in the general direction of the market, so it is worth considering placing some bearish option trades with a sweet spot of 45 to 60 days out.  Here are a few ETF's and stocks to consider for bearish options:


Happy Trading!


Tuesday, September 8, 2015

Virtual Trading: Why I'll Be in Cash This Month

Virtual Trading: Why I'll Be in Cash This Month

It was nice spending the long Labor Day weekend with my family. We had a gathering of four generations with different ethnic backgrounds for a fish fry with Greek salad and some French bread.  That's about as much of a melting pot as you can get in America!

It wasn't just the good times and family that kept me, stress free.  The biggest reason is because I am mostly in cash right now. While we in US were enjoying our festivities, markets were open in Asia on Monday. They start the ball rolling on Sunday night for the rest of the world markets and set the tone for how the rest of the world markets react.

With the market is in correction right now, this isn't a good time to be taking any stock trades or bullish option positions. This is the time to be on the sidelines but also a time when staying sharp on your trading skills is a must. A lot of traders that I talk to have just given up on the market because they have lost substantial portions of their portfolio.  However, right now is when a trader should stay even more disciplined and focus on their Virtual Trading!

Most, if not all, brokers offer the ability to virtual trade so use this option to keep your skills sharp. Virtual Trading allows you to stay in the good habits of trading without putting any money at risk. It also allows you to test out new systems and theories, so use it to your advantage.

Maintaining Good habits

Maintaining good habits like building a watch list, or creating trade plans - is critical in the market environment we are seeing now.  Even if you're not planning to place a trade, the market could turn bullish and we could see a follow through day when we least expect it.

Having studied the last several severe (20% or more) market corrections, the same general theme appears. The market is predictable because human behavior is predictable.  Always remember that the market is really just human behavior on display.  Looking at the history, most of the gains in the market are made right about the time when the market has reached the low point of correction.  The ensuing "bounce up" of a true rally provides sustained growth for a few weeks before things start to move sideways.

In my Monday blog posts in August, I identified several stocks on my secondary watch list every week. For access to my primary watch list you can subscribe here

My secondary list is made up of stocks that are ideal candidates for Virtual trading. Not surprisingly, some of these stocks keep appearing every week due to my strict pre-requisites for consideration. 

These stocks show early signs of institutional support which means they could be the leading stocks when the market health improves. My stock list for virtual trades this week is:


Just a reminder - I'll be hosting a live presentation on my methods on September 26th that you're welcome to attend!  I'll be covering my process for selecting stocks and Ron Appel will walk us through some specific options techniques that can be used on the stocks my system produces.

If you would like to attend in person, we'll be hosting it at the East Lake Woodlands Country club from 9:30 AM to 12:00 PM.  We have limited seating available so sign up here to reserve your spot!

If you would prefer to review the event On-Demand after the fact, we have an option for that too.

Happy Trading!


Do not take a position unless you are prepared to sustain a TOTAL LOSS. Your loss could include the money you invested as well as commissions and transaction charges.

The Information I provide is for education and informational purposes only. The Information provided is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. The Information provided is general in nature and is not specific to you or anyone else.