Internet Relay Chat (IRC) and the Berlin Wall Falling

msp430_ircl_channel_43ohThis is the story of using the IRC when it first came out, long before most people heard of the Internet.

Connecting Through College

In the late 80s, when I was in college, I created an account on the school’s computers.  I dialed in with my modem from home.  When you dialed in, you were presented with a UNIX prompt. This was an all text world.  No images.  No nice web pages.  Just a command prompt and programs that output text.

In the 80s, all the colleges in the US were connected to the Internet.  There was no commercial dial-up service like AOL, yet.  So, it was virtually all academics and scientists.  There were no corporations.  No one charged for anything.  No one competed.  It was just people connecting to people and information.

One of the first commands I learned was ‘irc’.  Once you use this command to connect to an Internet Relay Chat (IRC) server, you type /help, and from there learn other commands.  I quickly discovered thousands of channels with thousands of people from all over the world.

The purpose was to simply let people chat.  It is a myth that the Internet became social in the late 90s.  The Internet was social from the beginning, particularly with IRC.

What was surprising was that the Internet included people and servers all over the world that spoke many languages, although English did seemed to be the predominant language.

Want to talk to people in Spain?  Join the #spain channel.  Germany?  #germany.  When virtually no one heard of Linux yet, there was always the #linux channel.  Want to create your own channel, just “/join #mychannel” and boom, you just created a new channel.  It was a level playing field in that anyone could create a channel and invite people to participate in it.  And, you could join any open channel.  Though, there were ways to make channels hidden, and require passwords to enter.  There was never a fee, and most were openly there for anyone to join.  The only requirement for using IRC was an Internet connection and a client program like ‘irc’ to connect.

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Free Communication Without Geographic Boundaries

This was an era when international long distance was prohibitively expensive.  Prior to IRC, you’d never dream of talking to people all over the globe.  So, imagine how exciting it was when, in 1990, one year after the Berlin wall fell, I was talking in IRC to someone who grew up in East Berlin!  I asked questions like, what was it like when the wall came down?  What was life like growing up behind the iron curtain?  How are you doing now that 1 year has passed and you’re now integrated with West Germany?

I’m not sure I could of called someone in East Germany, yet, since it was behind the iron curtain just a year earlier when it was unimaginable that you could call people there from the US.  I’m pretty sure you couldn’t do it prior to the wall coming down.  And, even if you could, it would of been very expensive if the person you wanted to call happened to have a phone.  My brother went to Moscow University in 1993 under the Perestroka program.  It cost us $30/minute to call him.  I tried to get him to IRC, of course.  But, that never panned out.

IRC Today

To be sure, it hasn’t changed much today.  It’s bigger, of course.  There are more servers.  There are lots and lots of bots (automated programs) on the IRC.  There are still a lot of people across the globe using it.

However, in an age when most people know the Internet via the face of Google and Facebook, the IRC can seem a bit antiquated.  Yet, for open live text chatting, there’s still really nothing that has truly replaced it.  Yes, you can IM and do other forms of text chat.  But, having a room open 24/7 that anyone can go to and just text chat?  As far as I know, someone has to open a Google hangout and invite people.  There’s no list of thousands of Google hangouts you can join, particularly without knowing anyone in the channels.  What if you want to join a real-time live discussion of a topic you’re interested in?

Client programs for connecting to IRC improved a lot, especially in the 90s, giving a graphical easy to use interface for people.  The good news is these programs are free and have only improved over time.  Whether you are on Windows, Linux, Mac, Android or iPhone, there are great easy to use client programs for connecting to IRC.  Don’t want to download and install a program?  You can now just use your web browser to connect to IRC.

 

 

 

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July 2016 Jobs Report Reveals US Economic Weakness

The dollar tanked and the the S&P 500 made a new all-time high when the headline news of the jobs report came out.  The probability an interest rate hike for December increased from 32.1% to 45.4% (calculated using 30-day Fed Fund futures prices).

Our trusted media reported headline news such as

U.S. Posts Another Strong Month of Job Gains

However, the news, which many investors and traders trust to make their decisions, has failed to look into the data in the report to understand what it really says.

The Devil in The Jobs Data

ZeroHedge pointed out that Obamacare offset weak industrial and consumer sectors.  In another article, they point out that private payrolls grew an unadjusted +85k in July, far less than the seasonally adjusted headline number of +217k.

Reviewing the labor report myself, I discovered that the only education category for those 25 and older with an increase in actual jobs from June to July was High school grads with no college.  The other 3 categories, including those with some college with or without any degree had a decrease in actual number employed.   (Table A-4)

The number of unemployed from permanent job loss (layoffs) increased from June to July from 1.848 to 2.014 million (+166k). Even the “seasonally adjusted” number, a fictitious number which is of course rosier, showed a 104k increase in permanent job loss.

Of course, with increasing layoffs come longer unemployment times, steadily increasing since May.  Average number of weeks unemployed went up in July to 28.1 from 27.1 in June.

May 26.7
June  27.1
July  28.1

Weakening US Economy

All this data points to a weakening US economy.  Educated workers are losing their jobs, being increasingly laid off.  Those on unemployment are having a harder time finding a job.  The increases that the headline refers to are high school grads taking jobs that do not add much to our economic strength, as they do not replace the high paying jobs being lost.  Many, of course, are temporary jobs due to the election season, which helps to explain the increase in high school grad jobs.

Clearly, as long as we trust a news media to do our analysis for us, and do not hold them accountable to critically review the jobs report, we’ll continue to be deluded by rosy headlines despite the truth being much less bright for the US Economy.

 

 

 

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Rosy labor report?

The jobs report this morning caused the S&P 500 to hit new highs of the year, a few points short of its all time high set in May 2015.  It is tempting to pretend like all is well, and just buy stocks, and hope for the best.  Yet, perhaps the best way to protect your nest egg is to take a closer look with a critical eye.

I heard a few unconfirmed things today from traders regarding that report:

  • June was revised down from 38k jobs to 11k jobs
  • A large portion of the new jobs were people 55+

Note that gold and bonds soared today (my two favorite investments of the year).  #1 on the selling into strength list for most of today was SPY (S&P 500 ETF), with the IWD (Russel 2000) at #4.  This is post-brexit profit taking which is common when they believe the market is reaching another top.

ZeroHedge has an interesting critique of the jobs report that soared the markets today:

The Bearish David Rosenberg Reemerges: “What If I Told You Employment Actually Declined 119,000 In June”

Selling into strength:

sellingStrength-2016-07-08

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Building a long-term position in gold via NUGT

I and others I know have found ourselves chasing gold.  We periodically get a nice position, take our profits, and then find ourselves missing out on the next big move because we cannot find good entry.

This has been driving me nuts all year.  While I finally just bought a gold fund in my 401k in April so I never miss out on an up move again, I’m still far from fully benefiting from the continued rise in gold.

Typically, I prefer gold futures (/GC) as a vehicle.  However, they suffer from two major limitations.  They do not have weekly options, and their options only go out a couple of months.

Thesis: Target for gold is 1600 before the end of 2016.

This is a thesis I’ve held for 2016 since mid-2015.  The first half of the year sure has confirmed the thesis.  I won’t get into all the reasons gold is soaring this year in this post.  But, the positions I’m describing here are based on capturing profits if this thesis continues to prove true.

There is good news.  While gold has risen from 1060.50 since the beginning of the year, gaining over $300, or 30%, in order to hit $1600, gold has about $230+ more to go.  That’s still a nice gain to capture.

So, how do we capture it without constantly chasing price and hoping gold doesn’t soar while we ‘re sleeping in the Asia and European sessions, or looking for a pullback that never comes while it rips in front of us?

Fortunately, in addition to being a 3X leveraged ETF of gold miners with a high correlation to the price of gold, NUGT also has weekly options, and has options all the way to January covering our time frame.

There are some principles to options you’ll want to understand for this strategy:

  1. The further out in time they expire, the lower the delta and theta.  The former is good when it is going against you.  The latter is the cost of having lower short-term price volatility.  We’ll leverage this lower delta to scale our position when we think /gc could ultimately retreat quite a bit, yet know we can’t guarantee how far it will pull back either.
  2. Because we’ll primarily begin by building a position that decays extrinsic value, it is important to understand that extrinsic value is highest at the money (ATM).  The further out of the money (OTM) or in the money (ITM) you go, the less potential profit from the position.
  3. Because NUGT is a 3X ETF, it consumes a lot of buying power even for margin accounts.  We’ll address this by ultimately looking to create verticals.

Long via short puts

At 1357, and having only been in the 1300s for a short while, we view /GC as being 1/2rd through a 1300-1400 range.  Many are betting it will hit 1400 soon, and plan to short it there.  So, it has a decent probability of racing back to support near 1308.  Yet, due to the reasons it is soaring (bonds having negative returns, currencies unstable, and brexit), there is never a guarantee it will come back down that far.  We want to be sure we have a position in case it soars without an ideal pullback.  Yet, we don’t want to be too exposed in case it does drop back near 1300; and, want to be able to add to our position if it does.

Thus, at this level, we’ll begin our position with low delta short puts by going out to December expiry.  For the strike, I choose to be near the money to maximize extrinsic value.  The good thing about December is the premium is high enough to easily get a break even of $100.  Selling a 160 Dec for $55 means your break even at expiry is $105.

The delta on Dec 160 is currently -.29.  That means that the option price is expected to decrease by .29 per share for ever $1 gain in NUGT, presuming volatility doesn’t change, and not taking into account theta burn.  That is what we like being so far above what we currently consider strong support.  We’ll take a lot less heat than a put that will be expiring soon at the same strike if /GC drops $60.

Our goal is to turn this into a vertical, as we believe /GC has a high probability of shooting for $1400 before coming down.  If you are not comfortable opening a naked option position, or don’t like the buying power reduction (BPR), you can just begin with a vertical.  However, I’m choosing to open the short side first, then the long side if /GC goes higher in the near-term.

After selling this put.  I created an order to buy the 140 Dec for $20 less than I received for the 160.  If I’m super lucky, and it fills, then I just locked in max profit on the spread!  Realistically, though, I’ll look for resistance on /GC, notably 1400, and do a cancel/replace for whatever I can get then, because I anticipate a pullback there on first touch.  Regardless, it is likely to be a lot better than what I’d pay today, both because it will be worth less due to the delta, and because time will pass, burning theta.

Note that you are never locked in.  Let’s gold hits 1400, we buy the put creating our spread, then gold drops $90.  We could, at that point, close the long put for a profit, or roll it to a different strike to widen our profit potential.  The idea of putting it on is to lock in a higher probability of profit while creating some downside protection.  Once we’ve used that downside protection, we can choose to remove or reduce it.

If /GC drops before I get a chance to do it, then I’ll just be stuck with a naked put for awhile, and wait until /GC runs again.  Like I said, if this isn’t for you, you can just open a short vertical and be done with it.  I’m just trying to maximize potential profit and probability of profit by putting some swing trading into how the position is created.

If the naked put is a little uncomfortable, but you want to try to time the sides of the vertical, you could start with the long side first.  The down side it will be decaying while you wait for entry on the long side.  The good news is that the decay will be relatively slow since you went out to December.  That Dec 160 currently has a theta of -.16.  Contrast that to the 160 expiring in two days with a theta of -$1.30.  If you do the long side first, then you’ll be hoping for a nice pullback to complete with the short side instead of waiting for /GC to go higher.  If you feel strongly about which direction it is likely to move in the next few days, this can also factor into which side you do first.

Scaling Based on /GC price

What do we do as /GC comes down towards our major support, but isn’t there yet.  Remember, there’s no guarantee it will get there.  So, we want to balance the possibility it can just drop to 1340 and bounce and never go below it again for the rest of the year, with increasing risk and potential profit as it approaches 1300.  To do this, I’ll use closer expiries as it drops.  Perhaps Nov in 1340-55 range, Oct in 20-40 range, etc,…  The closer it gets to the bottom of it’s potential range, the more delta we’ll be willing to risk to collect more from theta burn.  🙂  This is optional.  You could stick to Dec.  I just like to increase reward/risk as it approaches support.

Note that once it gets down to 1300-15, even a short OTM put spreads can be very lucrative.  Analyze these and decide if they aren’t good option for you.  I just don’t think they are lucrative enough until /GC is down there to be worth the heat.  But, they are on my list of potential positions to open there.

Long Calls to Maximize Profit Potential

The next part of this strategy is what we’ll do if /GC pulls back near 1300, where we believe there is strong support and it will likely bounce like the last time it came near 1308.  For one, you can immediately sell short puts that expire in the near-term for quick profits on that bounce, or even if it ranges there for a bit, as theta will decay fast.  Then, take the cash you raise from that, and buy some Dec calls.  You’ll have to pick the strike you like and are willing to pay for.  But, here’s where you turn a potentially profitable position into a really potentially profitable position.  The potentials gains of Dec NUGT calls if /GC goes from 1300 to 1600 by then are huge.  The good thing is you’ve effectively financed these with short puts.

To be clear, there is a lot of downside risk to this position.  I have strong conviction so am not too concerned about that.  Yet, once your put side consists primarily of verticals, your risk will be limited.  If you timed it will, then you really reduced your risk.  If you get lucky and the difference between price you collected from short side and long side is same as spread, you have NO RISK on that spread as you already collected max profit, and will just wait for payday!

Variations

To be sure, you can use different underlyings and combine them in different ways.  The important thing is you are capturing both delta and theta burn on anticipation of an up move in gold, with little to no risk if gold doesn’t climb, and you are managing and limiting risk to the downside.  You’re also timing it to obtain the best position given the uncertainties.

Alternatives include using /GC options, GLD options, or anything else that moves with the price of gold.

 

 

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US Commercial Real-Estate Storm Brewing?

One counter I hear to the possibility of a recession coming to the US before the end of the year is that real-estate is booming.  Is it?  It has for 6 years, but this year doesn’t look as rosy.

In this Bloomberg article, the article suggests there are several reason this market could drop within the next 12 months:

Pimco Says ‘Storm Is Brewing’ in U.S. Commercial Real Estate

Signs of a cooling real estate market have emerged across the country since the start of the year. Commercial-property values in big U.S. cities, which have seen the largest increases during the recent boom, have declined 3 percent in the past three months, Moody’s Investors Service and Real Capital Analytics Inc. said in a June 6 report. Real estate transactions in New York, the biggest U.S. property market, are forecast to decline by as much as 30 percent this year, brokerage Cushman & Wakefield said in April.

 

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Major Economies Are Not Raising Rates in 2016

If the US raises central bank (CB) rates this year, it looks like it would be the only major economy to do so.  So far in 2016, major economies are either lowering rates, or leaving them steady.  The ECB, for instance, hasn’t changed rates yet in 2016.  But, that’s because they are at all time lows of 0%.  Other European countries, such as Sweeden, Denmark and Switzerland, have been experimenting with a so-called Negative Interest Rates Policy (NIRP).

So, who is raising rates?  Looking at the list of rate changes in the first 5 months of 2016, the two largest countries to of raised rates are Argentina and Denmark.

Argentina.  According to the IMF, at less than 1/30th the size of US GDP, Argentina is ranked 21 in the world for GDP in 2015.  But, not only is the largest economy to raise rates this year relatively small, it is raising rates to combat hyperinflation after years of printing their currency, a result of years of political corruption of populist leaders printing to meet campaign promises. So, it should not surprise anyone that they raised rates from 35.43% to 36.9%.  On the plus side, this is lower than their all-time high of 1390%.  I also heard from a resident of Argentina that they recently elected a leader who is restoring a free market to Argentina, and trying to reign in the craziness that lead to constant depreciation of their peso.  That friend cautioned, however, that it will take years for the reforms to take hold and restore this economy.  I was a bit more optimistic about the pace until I saw that they had to raise rates again.

Denmark.  At half the size of Argentina, the IMF ranks them in 36th place for GDP.  If you believe that central bank depository interest charges are “negative interest rates”, then they kicked off the year by raising their CB rate from -0.75% to -0.65%.  Many don’t expect another increase until next year, and don’t expect to see positive rates until at least 2018.

The two largest economies to raise rates so far this year are, in fact both relatively small compared to the US, EU, China and Japan.  And, clearly, they are both in extreme situations, one fighting hyperinflation, the other fighting deflation.  Neither move is an ordinary increase designed to cool off an overheating economy to smooth out the business cycle, the primary justification for why the US has claimed it raised rates in the past.

If the US raises rates this year, it looks like it could be very much alone in the world.  In my lifetime, I have never seen such a context.  Not sure it mattered prior to my lifetime as the economy wasn’t globally connected back then.  This is history in the making.  Can the US raise rates in a global context where the world is combating slowing growth, deflation, and in a few countries, currency printing induced hyperinflation?

 

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Investing and Trading Resources

UPDATE July, 23, 2016: This post was moved to and is now being updated at Trader Central, a team of traders helping traders.

Here is a collection of valuable resources for Investors and Traders.

Links

TraderCentral Mail List – Traders helping traders.  An email list where traders can discuss ideas, help each other learn, and just have fun.

Weekly EIA Petroleum Report – Crude oil inventories typically released weekly on Wednesday morning.

CME FedWatch – Current interest rate change expectations, calculated via 30 day fed fund futures pricing.

Forex Economic Calendar – Schedule of global economic releases, including ratings of impact.

SEC Edgar – SEC filings.

Benzinga –

AgWeb – Agriculture information for the futures trader.

LBMA – Current spot price of gold.  They set it via an auction process.

VIX Central – Quick current and historical view on volatility.

Best Times To Trade Futures – Blog post with global open/close in EST.

Benzinga – Market news, analysis and pre-market preparation resources.

Videos

James Dalton

The First Hour of Trade: How Important Is It?

Books

A Complete Guide to Technical Trading Tactics

 

 

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Market Update: U.S. stocks see worst opening week ever

We witnessed history this week, as 2016 was kicked off with a market plunge.  Of course, if you followed the posts the previous week, and hopefully created a position to profit from long volatility, your portfolio should of reaped some nice profits, as UVXY 13,47 -0,98 -6,78% roared from under 26 to 45.

As noted in Sunday’s blog, the key to watch on Monday was the support that held the markets in a range since October 22nd.  That broke Monday, and predictably plunged after that.  For those who receive Invest Wisely emails, you hopefully enjoyed the updates Sunday night and Monday morning preparing you for the breakout.

The biggest problem I had this week was because my positions have limited profits in order to reduce risk by lowering the break even point, benefiting from time decay, and having a higher probability of success, I was able to take profits quickly, and found myself mostly in cash by Thursday.  No wanting to be on the sidelines while volatility continued to spike, I took out a 22/34 long call spread on UVXY, and closed half my position the next day for an 18% return on capital (ROC)!

What’s Next?

To put it simply, I consider it likely that we’ll have two more down days.  What happens in Shanghai will impact the volatility of the next two days as it remains our daily wild card.  Yet, the bigger factor is simply technicals clearly visible on charts.

The vast majority of traders are expecting the market to retest August lows.  As you can see on this daily Nasdaq 100 futures chart, we’re probably a day or two away from that.  It most recently just broke a minor trend-line support that it bounced on Thursday.

Nasdaq 100 futures - daily

Nasdaq 100 futures – daily

On this chart, we’re looking at August support around 4000, with the 8/24 close at 4002.5.  Of course, this was after an intraday low of 3908.25, with a strong pull-back above 4000.

On the S&P 500 (SPX 3.168,80 +0,23 +0,01%), we’re looking at an 8/25 close of 1867.61 for a possible bottom.  Note, by the way, that while I’ve been using the Nasdaq 100 futueres chart a lot recently due to how the Nasdaq has been leading the markets both higher and lower, the S&P really does a great job of showing that we’ve been on a downtrend with lower highs since July.  Don’t wait for “official” TV talking heads to tell you when we are in a bear market.  Look at this chart and decide for yourself.

S&P 500 Daily

S&P 500 Daily

Note, that it was in July that I began to move my 401k to cash.  As a result, while the markets closed 2015 negative, I managed to hold onto my gains, ending 2015 in my very limited 401k with an 11.9% return.  Yes, you can time the market.

Bounce Coming?

Yes, most traders, myself included, expect a nice bounce, probably beginning Wednesday.  Keep in mind, if you are looking to sell long assets, or re-position for long volatility again, this bounce is very unlikely to return to the Oct-Dec range it was in.  That range is now what we call a “topping pattern”.  Those patterns, especially when they take months to form, tend to repel the underlying back down when it tries to approach it.  Thus, if I had long assets I wanted to sell at this point, I’d wait for that first attempt to approach it, which, on the S&P, is around 2000.

The red and green arrows on this S&P 500 chart show the most probable path the markets are likely to follow, with the bounce in green.

Probable bounce in S&P 500

Probable bounce in S&P 500

Of course, “probably” is not “guaranteed”.  Markets could just return to 2008 behavior, plunging on below its August low.  Or, alternately, it could reverse before reaching it, or just spend time near it trying to decide what to do next.  You’ll want to watch it closely for confirmation.

Nevertheless, this is the path most technical analysts expect it to follow.  Expectations are important, because they drive the decisions that ultimately drive the day to day market gyrations.  Overall, economics (including government and central bank decisions) drives the big picture, and news can change daily direction. Yet, technicals remain a powerful factor in deciding how the market bounces around.

Rally In Oil Coming?

Not too many people can agree, or will even attempt to call a bottom on oil.  However, oil does follow technicals very well, as one of the last things on earth that the central banks and governments cannot impact the way they’ve impacted the markets as a whole, with interest rates and quantitative easing.  Thus, oil has a strong tendency, like the dow does on numbers divisible by 1000, of having strong support and resistance on numbers being divisible by 10.  You can see this on any historical oil chart.

Thus, I believe, as we are rapidly falling to 30, the setup is in play for a strong bounce off of 30, or something close to it.   Note that, it is the FIRST time it hits this that matter.  In March, when it came close to 50, it had a huge long bounce to 67, and didn’t see 50 again until August.  But, the 2nd time, in August, this was a dead cat bounce, taking it into 40s.  The first time it approached 40 in September, it quickly bounced to over 50.  But, the 2nd time, in December, it ran right through it, stuck under 40 since.

Also, when it bottoms, it may be a similar setup.  Looking at Nov 2001 to Feb 2002, it didn’t go far below 20, and then closed and opened each month just below 20. This became a bottom it has not seen since.

Either way, whether a bounce or a bottom, going long oil near 30 just looks like a high probability of success setup.  Perhaps Wednesday, combined with a market bounce, will be a good time to enter such a trade.  With the Crude Inventory report coming out Wednesday at 10:30am, any hint of optimism can light this pent up rally in oil.

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Market Update: Bears 6, Bulls 0

What’s more exciting — what happened today, or what is about to happen?  Let’s start by dispelling the myth that there was hope for bulls today.  Despite it being a choppy day, with plenty of bounces to give bulls who only look at price hope, this was a very bearish day.  I’ll introduce you to the quad display, which includes market internals traders use to see what the market is REALLY doing on the inside.

The critical chart here is the top left one: $VOLD.  It begins every day at 0, and represents the volume of shares that went up minus the volume of shares that went down on the S&P 500.  Each candle is 15 minutes.  This thing can normally change direction when the market changes during the day.  But, not today.  All day, it went down, and down, and then down some more.  There is only one green candle on the whole chart, and you need a microscope to find a wick on any of these candles.  It is rare to see this go down virtually non-stop the entire trading day without the market also doing the same.

S&P 500 Market Internals - The "QUAD"

The next important one is the bottom right.  Unlike the other 15m charts, on this one I zoomed out to 1 hour candles so you can see how it has looked since Tuesday.  Note how choppy it has become.  And the right end, you’ll see that at 8pm, the normal Asia induced drop kicked in to bring it down to new lows of 1963. The Nasdaq 100 futures, by the way, despite being a bit more feisty, dropped very near its morning low of 4386, currently at 4390 and dropping as I type (it just hit 10pm as I took the screenshot, so that last 5 second sliver of a bar is green.)

Nasdaq 100 Futures (10pm)

Nasdaq 100 Futures (10pm)

Yet, while oil has dropped to new lows of 32.77, one bullish chart I shall leave you with is gold, which just temporarily went over 1100 for the first time since November 6th.  you can see it has clearly broken above the nice base it has created since then.

Light Sweet Crude Futures (10:05pm)

Light Sweet Crude Futures (10:05pm)

The Plan

Despite all this bearishness, I’m really hoping for a bounce, or at least a sideways day tomorrow, so I can open a really short-term position to benefit from the next drop, which could potentially happen Friday through Tuesday.

I’m leaning towards a long ITM put spread with limited profit, but lower risk than just buying an ITM put; but haven’t sat down to do any calculations, yet.

For next week, I’m hoping to go long oil, perhaps to take advantage of a bounce off 30, for perhaps a week.  I’ll post options I’m looking at for that, probably this weekend.  That, by the way, can potentially fuel a nice bounce rally in the market with lot of short covering, so I plan to be out of my long volatility position completely by Tuesday.  I took more profits today, and will continue to do so this week into the beginning of next week.

To kill boredom, I’m doing some small plays, including short Feb calls on HYG 87,02 +0,10 +0,12% and short puts on GPRO 3,98 +0,08 +2,05%.  Honestly, despite GPRO looking crazily positive this past week, I’m not too excited to be bullish any stock today.  In fact, while my IRA has been up every day the market has dropped, profits have been limited by the few stocks I have in there being among the few things that have gone down.  But, I played GPRO small, at the 16 and 17 strikes, and am OK if I end up owning a few hundred shares.  I’ll just sell calls right away to collect more premium, further lowering my cost basis, and potentially exiting the position if they get exercised.

HYG is something I’ll likely sell calls in throughout the year, rolling as needed, as that has a medium term downward trajectory.

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Where Is The Market Going? (Jan 5, 2016)

This has been a very profitable week. As I’ve been saying, when the market breaks through the supports of the trading range it’s been in since October 22, it could possibly retest its August lows, giving it a lot of room to fall further to get there.  In my last post, I warned it could happen Monday, which it did.  This, my friends, caps off one of the most profitable weeks I’ve had, after going long volatility last Tuesday, primarily via short puts on UVXY.

To summarize, I took 25% of my UVXY position off the table to lock in profits.  This included my long vertical call spread with a delta 1 option.  Otherwise, I remain bearish, and the market could drop further into the beginning of next week.  I hope to close the majority of my UVXY position by next Tuesday.

I have other positions open. They are traditional premium collectors I opened about a month ago with Jan expiration.  They are doing very well.  My GTC limit order on my short vertical call spread on PNRA 314,93 0,00 0,00% filled today, taking 50% max profit on that one.

Where Is The Market At Today?

After breaking through all the supports I had marked on my Nasdaq 100 futures chart, it ended the day with a bounce.  I suspect many thought this was the typical reversal it does when it hits the bottom of the range.  But, this didn’t hit the range, IT BROKE BELOW IT!  So, no, this was not a reversal.

Last Wednesday, longs got pounced.  Believe it or not, some tried to go long again on Thursday, and they were run over by a bus.  So, when Monday came long, longs were wiser and stood on sidelines.  This permitted day trading bears to short the daylights out of the market with no resistance.  Well, only one problem with this scenarios.  Day traders close at the end of the day.  And, instead of having a mix of bulls and bears closing like what you’d see on a normal day, this was all short covering.  So, the market soared in the last 30 minutes of trading.

Keep in mind, though, that this was just after breaking major support, and after coming down from a lower high last Tuesday.  Even though it ended the day back above the supports, those supports, like shattered glass, were now very weak.  Traders also knew that the end of day bounce was not a reversal, but a short covering.  Indeed, with the unknown of what was to happen in China Monday night, with the Shanghai market closed prematurely on a breaker after losing 7% the previous trading day, no smart bull was going to open a position late Monday just to leave it open overnight.  That would be CRAZY!  So, there were virtually no bulls buying on Monday.

Tuesday night…  China opens and tanks.  But, the government comes in and props it back up.  Unlike the west, the China government props up markets just like it props up the Yuan.  So, honestly, no one believed the return to unchanged signaled any true calm in China markets.

Today is what we’d call a balancing day.  No real direction.  A bit down.  A bit up.  Profit taking on over inflated profit rich Nasdaq (NDX 7.465,00 -242,00 -3,14%), which, down 0.30%, was the only major index down today.  The S&P 500 closed up 0.20%.

Ordinarily, this bottom after the steep drop would be bullish.  In an individual stock, a long would say it was establishing a base from which to take off from.  But, the bigger picture is that this time the risk is greater to the downside.  This is probably the calm before the next storm.  Thus, I remain bearish, and will watch closely to see what tomorrow will bring.  Because I’ve left the majority of my long volatility position open, I’m betting on a move to the downside.

With the Nasdaq continuing to lead the other indices, currently down, but previously up as well, I will refer to my trustee old Nasdaq 100 futures chart to provide the big picture.  Note the last candle crossing the yellow support.  It is now 9pm.  That last candle is what has happened since 5pm, because that begins the new 24-hour day for the futures.

Nasdaq 100 futures - daily

I do not currently plan to open any positions this week.  This week, for me, is about continuing to profit from the position I primarily created last Tuesday when the market hit that upper yellow line.

If the market clearly begins a quick descent, I might open up a quick delta 1 put position on QQQ, basically shorting the Nasdaq.

 

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