Wednesday, June 30, 2010
Tuesday, June 29, 2010
Thursday, June 24, 2010
Wednesday, June 23, 2010
Tuesday, June 22, 2010
-NFLX fell 5.9% yesterday to close at 118.99 without any significant news. The stock drop may have been due to simple profits taking on overbought situation. It seems foolish to be bearish on NFLX on just technical sell signal, but CSTR, another high flying stock of late is breaking down, again without any negative news reported.
- Whenever P&F Indicator changes, it's a signal that the stock price is likely to move away from the current price and/or stock price may show high intraday volatility within the next several days. There are a few ways to play this indicator. I could buy July $120 straddle and scalp gamma or bet on a call or put spread buying $120 call/put and selling either higher strike call/lower strike put, depending on your view of probable short-term direction of the stock.
- Volatility in July is a bit high, especially considering the July 4th holiday weekend, but if NFLX price drops below $114.7, we could see a stock price drop to $105 easily, again purely on technical stock price movement.
-I recommend buying the July 120/110 put spread for $4.10 or under, current stock price is $118.77 and spread mid market is around $4.0.
Monday, June 21, 2010
- I woke up this morning and heard the news about China allowing its currency to appreciate against the dollar. I immediately thought stocks of basic materials and other commoditiy stocks would rise, CLF, RTP, AA, FCX. Then I heard Meredith Whitney talk on CNBC about a possibility of a double-dip in housing slowing economic recovery in the U.S. Homebuilder stocks as reflected by SPDR S&P Homebulders ETF (XHB) have been one of the weakest sectors falling from high of $20 on April 26, to its current price of $15.92 and has shown relative weakness during the current rebound in the overall market. I quickly came to awareness that the market environment has turned 180 degrees from beginning of May.
- Throughout the market correction, fears of relative economic weakness in Europe and China with hopes of continued strength in the U.S. dominated. Now, I believe these fears and hopes are reversing, where fears of economic weakness is with the U.S. and hopes of continued economic strength is with China and other BRIC countries. As for Europe vs. U.S., equity prices have discounted the fears in Europe, I am not sure if stock prices are yet discounting the fears of U.S. economic slowdown.
-If market currents have indeed reversed, then expect to see relative strength in commodities, global industrials and global tech companies, relative weakness in retail, homebuilders, financials & stocks of companies predominantly geared towards U.S. economy.
Friday, June 18, 2010
Thursday, June 17, 2010
Wednesday, June 16, 2010
-Based on FDX management's outlook, I believe that fears of global economic downturn is overblown and as these fears continue to subside, stocks that are leveraged to "the very large trend of emergence of middle classes in India, China, and Brazil" should continue to perform well.
-As for FDX, I do not expect the stock price to fall below the recent low of $76 based on management's bullish outlook. Assuming FDX stock price not to go below $76 and rise slowly for the next few months, I would buy the Oct. 80 calls, sell 2 Oct.90 calls and buy Oct 95 calls (1x2x1 spread). At current prices, this could be done for $3.32. Maximum loss on this position is $332 for 1 spread if FDX stock price remains below $80 with maximum gain $668 if FDX closes at $90 on Oct 15.
Tuesday, June 15, 2010
Monday, June 14, 2010
-In range bound markets, only a few cluster of stocks or sectors show strong trends. Even during the violent market fall over the past several weeks, few individual stocks are at or near their most recent highs. CRM, NFLX, AAPL, many REITs, LVS, auto parts stocks, CMG, etc.
-I mentioned the Natural Gas sector as having potential to move up in the next several weeks. Many Natural Gas plays are on this list. These companies also drill and explore for oil, but much of that is land-based (not offshore based) drilling. There are also many ADRs on this list, which makes sense if we assume that the strongest economic growth will remain with China, Brazil, & India.
-But the common factors among all these stocks are that each is at or above both their 50 & 200-day moving averages. Furthermore, each stock's price has been moving within a range for the past 6 months or longer. I also looked at Volume by Price indicator on Weekly charts, provided by http://stockcharts.com/h-sc/ui?s=CHL&p=W&b=5&g=0&id=p32746176393 When a stock starts to move away from the price range it has recorded the most volume, it tends to meet relatively little resistance to moving much higher (or possibly lower) before it settles down at a new price range.
Friday, June 11, 2010
Thursday, June 10, 2010
- All options traders want to know future volatility. All options pricing models try to estimate future volatility. Firms invest millions in the latest high-tech supercomputers and pay a battalion of PhDs that use GARCH, multivariate regression, neural network models, etc. to estimate future volatility. Why? Because if you knew or can accurately estimate what future volatility would be, then you could determine if current implied volatility of options (hence current options prices) is too low or too high. You could buy/sell undervalued/overvalued options and make billions of dollars.
- Well, I am highly analytical, but I am no scientist. And I cannot predict what future volatility would be. But I do have options trading experience, some expertise in technical analysis, and a good sense of what direction future volatility is likely to be.
- Most options traders dismiss technical analysis as alchemy. I do not blame them because most of technical analysis (i.e. chart pattern reading, fibonacci, etc.) you hear often about is worthless. Heck, many so called technical analysis experts do not even know how to draw trendlines properly. But there are simple but very powerful tools in technical analysis that you could use as a guide, rules of thumb. You live your life that way, why would you not incorporate guides to your trading and investing?
- Jeffery Owen Katz, Ph.D. writes in his oft read book ("Advanced Option Pricing Models...", McGraw Hill); "Future volatility is also affected by the location of a stock's price relative to its moving average, by the slope of the moving average,...by where the current price lies with respect to recent highs and lows,..." Well that reads to me that technical analysis could be very useful to estimating future volatility!
- The graph above shows the weighted average of implied volatility for SPY (taken from LiveVolPro) since the beginning of 2010. I also graphed the estimated future volatility calculated by using my indicators shown on TEMA charts. My estimated future volatility is determined by a function of Volatility 2 Indicator,Volatility 1 Indicator, and the Linear Regression Indicator. What I see is that my future volatility estimates often turn higher/lower before it is reflected in the trend of implied volatility!
- I need to do more analysis on other stocks and for longer time periods to make a more definitive conclusion. But I am sharing this with you now because I feel strongly that TEMA charts and indicators are fundamentally sound when used as a guide. At least, I hope to educate and bring about greater awareness to equity/options traders....
Wednesday, June 9, 2010
Tuesday, June 8, 2010
- Natural Gas is the only sector that is looking bullish right now. The oil spill catastrophe, offshore oil drilling moratorium, & growing government support of the "Pickens Plan" (greatly increasing tax incentives for natural gas vehicles) are all fundamental factors that are making natural gas and natural gas sector stocks more attractive.
- Furthermore, the price trend of Natural Gas, as reflected by UNG (a natural gas fund ETF that tries to mirror changes in percentage terms of the natural gas spot prices using natural gas futures), has shown that the fundamental factors driving the prices of natural gas are very unrelated to the fundamental factors driving the overall stock market, which is good because the overall market is very weak right now. And also, that price of UNG is about to breakout of its long-term bear market.
- There are many ways to play natural gas. You could go long UNG which is currently $8.19 with stop/loss of $7.40 or buy the Oct 8/10 call spread (buy Oct. 8 call $1.09 and sell Oct. 10 call for $0.42). I still like SWN as a play on natural gas, I believe SWN is taking a pause around it's 200-day moving average before breaking upwards.
Monday, June 7, 2010
Friday, June 4, 2010
The Point & Figure Trend also reflects the short term trend, although this indicator seems more reliable not to pointing out the future direction of prices, but rather to indicate that prices are likely to move away from the current price. Buying at-the-money straddle in options, whenever this indicator changes could be a good strategy.