Tuesday, January 30, 2007

Anatomy of a FOREX Trade

In a recent post I mentioned how the New Zealand dollar was an attractive short trade. So today we're going to take a brief break from stocks and examine this trade idea, particularly since it helps illustrate how profitable FX trading can be.

First, let's look at the big picture. This chart spans about six years. The dotted red line indicates what I believe is a very strong resistance level (about .71, which is the ratio of the NZD to the USD). You can also see I've drawn a Fibonacci retracement series on this graph.

Looking at a shorter time frame (and remember, you can click on any graph to get a much bigger version of the image), you can see how NZD/USD marched from a little over .59 to .71 in the second half of last year. That may not seem like much, but in the world of FX trading, it's gigantic. So the basis of my suggestion a little over a week ago was that the tide was starting to turn on this huge move.

On a minute-by-minute basis, you can see how swiftly this currency has moved recently. Keep in mind the move over the past few days represents only a tiny fraction of the entire upward move. It really only went from about .70 to about .69, which on the surface seems like a mere penny.......virtually meaningless. But it isn't, as you shall soon see.

Below is a table of the profits from this trade. Simply stated, the profits were over 100% in just about a week. Not bad, eh? That's how much movement can happen in the highly-leveraged world of FX. Now, as you know, this cuts both ways. This trade could just have easily torpedoed the same amount of capital in just a short a timespan. What was operating in my favor, I believe was the core change in direction that I speculated was taking place when I made my recent post.

So what now? I have stepped aside for the moment and will wait for another opportunity to enter NZD/USD. There are no guarantees the price will bounce up again, but these markets don't tend to go straight up or straight down. They tend to bobble a lot, which is why it's important to have plenty of extra cash in your account in order to absorb the "margin shock" as the prices move. But if it pushes somewhat higher - like to .695 - I'd be happy to get back in and ride the next move down.

Speaking of moves down, just one stock I'd like to mention is NutriSystem (NTRI) which I suggested as a short very recently, on January 22nd. When I first mentioned it, the stock was at $65. In the short time since, it's fallen to $52, and I see in after hours trading it is losing even more ground, trading below $48 as I am typing this. You can imagine how much well-chosen puts would have soared in price based on this suggestion.

I'll see you tomorrow, after the Fed announcement!

Monday, January 29, 2007

Slow Start to a Big Week

This is going to be an action-packed week - earnings, the FOMC announcement, major economic reports. The whole schmear.

There wasn't too much action today, however. The market rushed higher, sold off to negative territory, and closed today with tiny gains. Basically nothing happened. While we wait for something more definitive, let's look at a few interesting charts.

Back on January 4th, the Dow 30 broke beneath a medium-term trendline. I've circled the event here. Notice how the most recent trading has stayed clearly beneath this former trendline.

Backing up in time somewhat, you can see this from a different perspective. I've pointed out in red the day the trendline was snapped, and I've pointed out with a green arrow the reversal off this trendline. As regular readers of this blog know, I am always fascinating by the "turncoat" nature of trendlines. We are now beneath the former supporting line.

If you believe tech is vulnerable, you might consider buying puts on the $MSH. It isn't very heavily traded, but there's plenty of potential downside here on the index (and thus upside on the puts).

The Russell 2000 remains my favorite index on which to buy puts. But we remain trapped in a trading range. If this pushes above $801, all bets are off. In fact, I'd get very skeptical if things even pushed above $796. This is a minute-bar graph:

The S&P 500 is a more popular index venue, although to my way of thinking this is not as vulnerable as the Russell 2000. But you can see trendline behavior similar to what was witnessed above with the Dow.

I haven't been trading the $XAU (gold and silver) for a while, but this index seems to be heading south. Even if it reverses, the recent high price is such an obvious stop-loss level that this is a pretty low-risk trade.

Now a few other short ideas to chew on. Exxon Mobil (XOM):

Chicago Mercantile (CME), which at these price levels easily gains or losses double-digits worth of points on any given day:

BP, which continues to be in the throes of forming a head and shoulders pattern (as yet incomplete).

And, lastly, Bank of America (BAC) seems to be finally falling - - with nice volume too! My puts on this have been inching higher.

My book is coming out in just a few more weeks! Stay tuned!

Friday, January 26, 2007

Stalled Bull

Even the most fervent bull would have to admit at this point that, at least for the immediate moment, things have stalled. The week as a whole was down for the markets, and in spite of a lifetime high on the Dow this week, there's plenty of news and market action out there to scare our bullish friends.

Let me show you something interesting. Below is a chart of the S&P 100 ($OEX) over more than a decade. I have drawn a Fibonacci retracement from the peak in early 2000 to the nadir in October 2002.

Now let's take a closer look at the same index. The 61.8% retracement level was 702.13. And what was the peak this week before it reversed? 699.99. In other words, the market climbed to 99.7% of its anticipated retracement before reversing. Pretty impressive!

The Dow Transports continue to be relatively bearish. I've marked the level they need to crack before we can consider this a new series of "lower highs/lower lows."

Although the S&P 500 pierced its retracement level a while ago, at least it neatly bounced off its trendline.

As I've said repeatedly, this is not a bear market until we break the uptrend. And we have not broken the uptrend! So the bulls still run the show. It is heartening, at least, to see what a monstrous divergence exists between the price action and the RSI.

For more bearish evidence, take a look at the NASDAQ. If you consider this price channel to be meaningful, take a look at the bullish upside (green) and the bearish downside (red). One is a lot bigger than the other, isn't it? I'd say the risk/reward ratio gives the favor to the bears.

Now - as always - some bearish ideas worth examining. Behemoth Microsoft (MSFT):



Camden Property Trust (CPT):


It's been a pretty good week. I'm sure those who follow NutriSystem, mentioned here several times as a bearish idea, enjoyed the drop today.

Thousands of people stop by each day to read this blog, and I want you to know I appreciate it. Doing this blog helps me think more clearly about the markets, and it's fun for me to share my views. Do keep swinging by!

Thursday, January 25, 2007


What is with this crazy market? Don't get me wrong; a triple-digit down day on the Dow is terrific. But this market is heading for the nut house.

Over the past trading week, there have been two instances of big bearish engulfing patterns on the $NDX. Today's was a whopper. Having a superstar like EBAY up in the double digits at the open and yet have a wipe-out like this is really encouraging.

The $SPX bounced off that resistance line beautifully. The market still has no direction, though. It's neither bullish nor bearish. Just schizo.

The rest are straight-up short ideas. AMX:

AutoZone (AZO), still in the stratosphere:

Carnival Cruise Lines (CCL), approaching resistance:

Black and Decker (BDK):

Goldman Sachs (GS), finally getting a reversal:


NutriSystem (NTRI), with its cup and handle pattern failing:


Sears Holding (SHLD), also weakening:

Now for your occasional clip of the day! The world's worst weatherman. Brace yourselves.

Wednesday, January 24, 2007

It is a Most Elusive Fish...

The markets were very strong today. At least I am not putting my foot in my mouth. I've made it very clear lately that until there's a clear "rupture", we're still in bull-land. Earnings season isn't doing a hell of a lot so far for our cause. It reminds me of a favorite movie clip of mine......

The Dow Jones 30, shown below, hit another lifetime high today. I wouldn't be shocked if we pushed all the way toward 13,000 in the coming weeks. Earnings from EBAY this evening have the stock up over 10%.

The S&P 500, while not at a lifetime high (its high in early 2000 stands unbeaten) is nonetheless at the very highest point of a massive ascending wedge. Looking at the charts tonight, it's obvious that the strength is widespread and devastating to the bears. (Goldman Sachs just being one of countless examples).

The only bearish holdout is the beleaguered Dow Transports. Of course, I'm sure the bulls will say Dow Theory is sad and outmoded and should be ignored.

If there are any living bears still out there, I like the looks of Adobe (ADBE).

...as well as Black and Decker (BDK).

For a bullish play, CRR looks like it is beginning to turn northward after a long slide.

Ryland (RYL) has recovered back to its neckline, although I use that term somewhat loosely since this isn't much of a head and shoulders pattern. All the same, with this much recovery under its belt, it makes going short the stock much less risky.

Much the same logic holds true for Sierra Health (SIE).

Lastly, I will mention one short suggested here, Textron (TXT), seems to be getting slammed in after hours trading. Nice to have one bright spot to anticipate for the morning!

Tuesday, January 23, 2007

Airport Quickie

This is going to be one of those "at the airport" quickie posts.

Today the market recovered partly from yesterday's sell-off. All eyes are on earnings, naturally. We are, for the zillionth time, in a middleground where it's not clear if the market's going to push higher or lower. Just look at this graph of the Russell 2000 from the past 60 days on a minute by minute basis. Just no clear direction whatever!

ANDE, a long suggestion posted earlier in this space, is continuing to perform well. Breaking above the horizontal line would obviously be a good thing for owners of this stock.

Bank of America (BAC), on which I own puts, announced great earnings today and fell. Good.

Lastly, Health.net (HNT), although not a slam-dunk pattern, seems bearish enough to mention.

For those of you who enjoyed BillyWitchDoctor.com yesterday, I'm glad. For those who had no idea what it was about, I congratulate you on your sanity.

Monday, January 22, 2007

Ultra Chicken

I've been wrong enough to know that I'm not going to start cheering on a bear market. The market was down today. I'm glad. Maybe it'll be down a lot more this week. Which will make me happier still. But until we have a no-doubt-about-it rupture in the uptrend, I'm keeping my furry mouth shut.

The $VIX may have formed a "V" bottom with recent activity, which would obviously be good for both put holders (me) and bears (me again).

I've mentioned AMLN a bunch recently, and it continues to behave like a good little stock (on the short side).

I take pride in being such a pure technician that I know only the ticker symbol - - I don't know the company's name, and I certainly don't know what it does. The symbol is AXR. I shorted it Friday. And today it lost double-digits of points. Nice.

I got burned a couple of weeks back buying puts on superstock AutoZone (AZO). I'm ready for more punishment.

Cigna is a much less volatile stock, but I see a double top here and a stairstep down these Fibonacci levels forthcoming.

Shoe god Nike is another security on which I own puts. It took a nice little stumble today, but I have much bigger ambitions on this one.

I haven't touched NutriSystem in ages, but I'm ready to go back into the water. There's a small head and shoulders pattern here, and this is the kind of fad stock that can succumb to gravity.

RAI is a good short in the world of metals.

...as is RTI......

Sears Holding (SHLD) is another item I've avoided, only because it has the makings of such a sensational cup with handle pattern. But this pattern is starting to look shaky, so I'm OK putting some risk capital into some puts on this one.

Lastly, a bit from one of my favorite cartoons - Aqua Teen Hunger Force. This one is only a little offensive, so you are probably safe clicking the Play button, no matter how far away you live from the coasts of this great nation.