Trading | Margin Rich

JJG Still Ain’t Ready

Posted on September 20, 2014 by Margin Rich

In my last post, I stated that I’d be sharing some thoughts on college football and I will later today with another post or no later than tomorrow. That’s a promise for any sports gambling addict readers who’ve been waiting with bated breath to read my words. I just wanted to share a couple of quick thoughts. One on JJG, which I wrote about a couple of months ago. Additionally, I wanted to share a note from the Price Action Lab blog as well. I regularly follow Mr. Harris’s work, but his note on Friday the 19th was the best work I’ve seen out of him.

For any readers who deign to label themselves technical analysts it’s a must-read. Really it’s a must read for any trader. In the very short but sweet article he covers these BTFD, V-shaped recoveries that started in 2012, agreeing with the timeline I also posited when squiggly-reading began losing its efficacy. Harris hypothesizes that this is due to central bank intervention. Have a look at the chart for yourself and consider back to the hard balance sheet expansion of the world’s central banks.

Harris goes on to opine that indexing’s time in the sun may have an abrupt shift into darkness. As for the last 5 years, he also basically states that what has been won’t always be. Take it for whatever it’s worth, but I recommend taking a few minutes to ingest the article.

Regarding JJG, don’t feel bad if you tried to bottom-tick that one too early. Them’s the breaks. I had stated that the trade looked ripe but that my indicators weren’t giving me a go. I also stated that I would send out an update if the indicators give the green light. Now this ain’t the update for the green light, it’s just to let any readers know that we’re still keeping an eye on the ETF. Soybeans, corn, and wheat are getting destroyed. It’s serious destruction and the greater commodity index (CRB) just took a dip past support, so it’s not looking good for a trade anytime in the immediate future.

However, one of my indicators has flattened out and the other appears to be following. Even if they do shift, that may simply lead to some bottom bouncing consolidation for several months as opposed to a V-shaped rocket ride upward. I wouldn’t expect a coffee style abrupt turnaround, but anything’s possible. Have a look at the weekly JJG chart in case you haven’t in a while.

Once the indicators have turned in favor of an uptrend, then the HFT shops may just juice this thing for nice little return. I hope to have you along for the ride on the timing of that one. We’ll have to wait and see. For reference sake, let’s take a look back at coffee’s beautiful halt to its downtrend and abrupt rocket ride upwards for the lucky schleps(or skilled) who rode that trend to the bank.

Alright, so read that article from the Price Action Lab blog. Keep a wary eye on soybeans, corn, and wheat. And enjoy Saturday. College football is back, so go pay your bookie a visit and dare to be great.

PS: Marginrich.com does not condone nor endorse any illegal activity regarding unsanctioned and unlicensed sports wagering. If you are compelled beyond your will to place wagers on the outcome of any sporting event maybe it’s time to seek counseling and admit the problem is real. Read those two sentences really fast like the MicroMachines commercial guy with the moustache from the 80’s and it’ll sound real official. And for anyone who thinks I’m insensitive to the genuine sickness that is a gambling addiction and reads articles here, get real, I write about speculation regularly.

Two Trades for the Price of None

Posted on July 11, 2014 by Margin Rich

Okay, so the Toyota trade did not work out. It was a low risk, little scalp for a few easy bucks. If you put the trade on and were stopped out, well then I’m sorry but them’s the breaks. You’ll notice a little lower in that article, however, that the coffee trade was a 100% nailed and there’s still room to run. Might have been luck. Only the trading gods know.

Today though, I’m going to share what are by now two very obvious trades to the world of speculators. One is a short, and it’s move has already begun. The other is a long and the play is still setting up.

First the short, it’s Delta Airlines (DAL) or rather airlines in general. Keep in mind this stock has become a hedge fund hotel along with American Airlines (AAL), which can be either a positive or a negative. On the one hand, the large institutional support can provide a ton of liquidity for any potential pyramiding of the professional positions. Additionally, shorts can be easily squeezed with the amounts of money that could potentially be thrown at the position. However, the short float is exceptionally low at under 2% so nobody seems to be expecting any sort of real selloffs despite the 12% down-move over the last 4 weeks. In other words, there’s not a lot of kindling for a hard short squeeze.

Observe this partial list of the 50 most popular stocks amongst hedge funds as of the end of May 2014, courtesy of the WSJ’s Moneybeat via Goldman:

The airline stocks have enjoyed a tremendous run. From the fall of 2012 to the spring of 2014, Delta was a 4-bagger. American has treated investors well for those that held the equity and the debt too as it worked its way through bankruptcy. The new ticker AAL, post-merger with US Airways, is already up around 100% since the beginning of the year. Allegiant, who I was very wrong about in a friendly argument with a colleague a couple years ago, has been a 3-bagger since the spring of 2012. Mr. S.P. off in Deutschland, you were very right and I was very wrong. I hope you rode the stock for maximum profits.

The airlines have garnered a lot of momentum in what I think will ultimately be temporarily profitable situations. Unions have been re-bargained with. Fuel has been somewhat reasonable. And the fees for this, that, and the other have been a huge boon to the airlines’ income statements. Maybe the industry has entered the new normal along with developed world economies, and the airlines will all be immensely popular investment darlings. We can crown them as the core holdings in a new era Nifty Fifty alongside Tesla (TSLA), King Digital (KING), and Cynk Technology (CYNK), because if there’s one thing airlines are known for it is profitability.

For my money though, I’m betting a little snap-back(or mean reversion as you pros like to call it) may be in the works. Valuations seem a bit stretched. Have a look at this chart from last month of the index of all the US airlines, courtesy of STA Wealth Management:

The blue line is the 36-month moving average. Does the chart say mean reversion or plow in for new highs? With no airline ETFs in existence anymore and the transport ETFs too diversified amongst all industries, you have to take your shot directly with an airline. With Delta forming its own little Eiffel Tower(on a linear scale chart), we have our short play. Observe the chart(logarithmic) below of Delta with Fibonacci retracements:

The 38.2% retracement target is essentially $30, so that makes for a reasonable 1st profit point on a short position. Winners have to be given room to run so you’ll have to consider the action in conjunction with the broader market along with your own stops before considering liquidating part or all of the position. My contention is that “Wood drastically underestimates the impact of…”; sorry about that. Had a Good Will Hunting flashback. No, my contention is that as market darlings the airlines could possibly lead a whole market sell-off, similar to biotech and social media a few months ago. Delta and American are already showing weakness, but especially Delta.

My two proprietary indicators gave a buy signal the week of June 30th. I almost never trade without their confirmation, unless I’m going for a quick scalp off the action of the tape. This is a real money move for me and I have already positioned into the short.

For you option players, be careful about the core strike of your strategy. For instance, $30 strikes for the September Puts and $35 for the Decembers have a ton of open interest. Things can get a little wonky around those areas so intelligently apply your tactics. Review your Greeks and determine the best course of action for this directional play.

The long play is the grains. Specifically, when the time is right I’ll be using JJG as the ETF proxy. JJG is weighted to corn, soybeans, and wheat. If you’re comfortable with futures and want to focus your efforts into a single grain, then knock yourself out. For the purpose of this analysis though, I’ll be referring to the JJG as the grains equivalent. All three components have been beaten down badly the past several months in a very intense selloff. Observe the following chart. In it I have listed the current potential Fibonacci retracements if the sell-off subsides this week. I’ve also displayed the retracements for the selloff of similar magnitude back in 2011:

For the 2011 correction, it’s easy to observe how important the 38.2% area was for approximately 10 months. Will that be the case again? Past is not always prologue to the future, nowhere more so than in the markets. However, there is additional evidence courtesy of SentimenTrader. Jason Goepfert was able to compute a hedgers index for futures of the ETF’s components, which was based on each grains’ weighting within JJG. Here are the results:

Now you can review the CoT’s to assess your prospects for the futures, but for traders of the proxy, this is a handy representation. You can see that when hedgers reach a net long position this tends to be consistent with a bottoming process. As the ETF was only birthed in 2007, the 7 years of data should be statistically insignificant in theory. Relevance is relevance and performance is performance. The reason the net long is important is because some of the biggest traders in these markets are the commercial grains producers themselves. Their product sales inherently have them positioned long, so they constantly hedge their sales with short positions. When we see a net long position set-up like what we currently have, then a rally may not be far off.

There could be further downside action, but sentiment is so stretched that there may not be much selling energy left. The selloff was so extreme over the last couple of months that I think the snapback will occur soon providing a potentially profitable trade with $44 as the first Fibonacci target. I have not entered a position here. I really like the sentiment and the chance for a contrarian play, but my indicators have not confirmed the move. When they do, I’ll post an update stating that the move is on. For now keep your eyes closely on the grains for a chance to garner profits this summer.

Again With the Discounting Mechanism

Posted on June 19, 2014 by Margin Rich

One of the biggest ism’s on the Street that has been pounded to death by any and all financial sites is the fact that the stock market is the greatest discounting mechanism in finance and is always looking out 6 to 12 months. This may seem rational to all you EMH’ers out there and there is of course evidence that can be pointed out supporting the markets’ abilities to discount for future events. Feel free to scour the web for all data pertaining to this notion.

I’m not going to get into the facts and fiction of the mechanism. I just want to provide a little reminder that the forward looking ability of the markets gets a bit fuzzy at the extremes. Whether it’s is an epic crash, a normal correction, or a bottom-ticking nadir; at the extremes the markets don’t exactly send the clearest message. Have a look at the S&P 500 since 2009.

You can see that the Flash Crash came out of left field for a lot of speculators in 2010. That strong uptrend wasn’t giving anybody any kind of forward guidance regarding what was about to happen in May 2010. How about the end of QE 2 in 2011? The last “real” correction this market has seen. It too had a nice positive uptrend going before pulling the rug out in the summer. Sure the normal seasonal platitudes could have been rested on, but nobody saw the blowout in August coming. And finally, look at the choppy action in 2012. It was difficult to get a bead on how to allocate, because everyone was busy worrying if the Fed would keep the punch bowl spiked and the dj dropping the base.

Did that choppy action of 2012 tell you that 2013 was going to be a mega-homerun year for people who simply invested long? Hardly. Even though the Fed announced to the world that it would provide unparalleled levels of liquidity to market players, many a professional was caught off guard at the strength of the move.

The S&P 500 is setting new highs here and the NASDAQ is fast approaching its highs off the 2009 lows. One can paint any picture they see fit with any sets of data they choose. In the end, it’s about your experience and gut in combination with robust data. Not going into a bearish spiel, again I’m just reminding that at extremes the markets can be less than reliable discounters. Consider all the world events simply being shrugged off by investors:

1. Ukraine civil war – label it anyway you want but that sure looks like civil war to me
2. ISIS taking over a fair chunk of Iraq with US deployments to the Persian Gulf
3. Chinese Commodity Financing Deals (“CCFD”) and the budding re-hypothecation scandal
4. The approach of no quantitative easing – seriously think about that for a second – NO QE if the Fed follows through on their word; a full taper is most definitely not being discounted.
5. Potential liquidation fees imposed by The Fed at bond funds to “prevent” bond runs

We’ll just leave it at that. For good measure though I’ll present you with a snapshot of the Financial Times cover from Tuesday June 10th, 2014.

This has been bandied about all over the web as the “Contrarian Indicator of the Year”, with the FT extolling the virtues of Central Bankers’ abilities to remove volatility from the investment picture. I’m not here to debate the efficacy of the Magazine/Newspaper Cover Indicator. If, however, this cover proves to indicate a bottom in volatility in 2014, did the markets discount that?

Revisiting an Old Friend

Posted on June 10, 2014 by Margin Rich

Today, I’m just going to highlight the potential of some price action. It’s not often that I offer up a trade as the sole topic of a post. No talk of corrections. No sovereign debts. No interest rates. No belly-aching about complacency. Just gonna put up some plain old charts showing some price behavior that could be used for profit.

Way back, as in a year ago, I provided an opportunity to short Toyota. It was a nice, profitable little trade that paid off immediately. For such a steady behemoth of the automotive world, Toyota tends to consistently present tradable short-term set-ups despite any prevailing macro-outlook at the time.

The pattern set-up is simply an exercise in gap-filling since the end of January. That’s it. No long-term backtesting of the pattern, which means that I’m not calculating probable odds with any statistical significance what so ever. In fact, it’s simply a read of the tape with a tight stop. Have a look at the chart. You’ll observe that since January 31st, TM has “gapped & filled” fairly quickly on 16 occasions(gaps at blue circled numbers – fills at green arrows). I may have left out a green arrow or two but the chart is convoluted enough. You get the point. A fill on gap numbers 17 and 18 is what we’re playing.

Shorting here at $115 with an expectation of a cover at $108. I leave it to the traders out there to calculate your own risk/reward numbers. We have a price behavior that has proven to occur 100% of the time, at least since the last day of January. Keep a stop of 10% to be relatively safe, which would essentially stop you out of the trade if it goes against the prediction and breaks out past the key number of $125.

You may be thinking that shorting here for a $7 move downward may not be worth the risk. A 10% chance of loss for a potential gain of only 6%? What gives? You can tighten the stop if you absolutely have to skew the risk/reward ratio in your favor. Let’s say the trade hits the objectives in 60 days. That 6% return on the short annualizes out to a 42% return. I think any professional trader will take 42% annual returns any day of the week.

There is of course the leverage of options, which is how I’ll personally play the set-up. I’ll leave you to your own personal devices when it comes to option strategies. Sorry. I ain’t Greg Harmon over here, throwing out Calendars, Spreads, Strangles, and Butterflies. For those that play the option game, do your thing. For those that don’t, stick with a simple short of the shares or perhaps buy a basic Put with an October strike, although beware the lack of a hedge on a straight Put purchase.

It is possible to go short in these markets. Dangerous, but still possible. Recall that I went short on coffee a couple of posts ago, on May 16th. Of course coffee is a commodity, but I used the ETF proxy.

In initially determining my price objectives for the short, I utilized a weekly chart. Observe the chart below for the basic presentation:

And for you Fibonacci retracement addicts, using the weekly low off the first week of November, then 31.8% is $34 and change while $30 is tightly in between the 50% and 61.8% retracement levels. I felt safe in using $30 as a round number objective, especially in light of the high open interest at the expiration month for the primary asset in my own play. Coffee may retrace all the early 2014 gains in a full construction of an Eiffel Tower. If you’re in the coffee short then adhere to your risk parameters and enjoy the profit.

Getting back to Toyota, trading in a low volatility environment can be dangerous. I think there’s enough volatility in Toyota’s tape to warrant the short. As with a lot of trades, you risk a little to fill your pockets with some change. This trade is one of those singles that people forget to swing for after striking out for the umpteenth time on a grand slam attempt. Please visit my disclaimer before leaving and taking any action. Good luck out there.

Triple Top Into the Chop & Drop

Posted on May 31, 2014 by Margin Rich

I hate to keep writing about corrections and being a fear mongerer. At this point, it’s pretty useless as the S&P 500 stays constantly bid under all conditions. The last little correction lasted a week exactly and took the SPX down approximately 4%. Before that was the approximate 6% correction we saw from January 23rd to February 3rd. That was 11 days and a casual observer of the market would have thought the rails had come off of everything the way sentiment crashed so quickly.

Honestly, I’m getting tired of hearing myself with the correction talk, so this will be my last post regarding correction or downturn talk for a little bit. I’ll find something else to entertain and possibly inform you with, because this subject is tired. Especially, when you consider the following charts. I originally titled this post as I meant to write it several days back, when the SPX looked like this:

However, we seem to have experienced a “clear” breakout so we’re not technically talking about a triple-top anymore…unless it’s a bull trap. Is it a bull-trap? Hindsight will inform us. In my humble and probably very ignorant opinion, I think it’s a bull-trap. There’s just enough buying power left to draw in some last suckers before corrective action. It’s not unheard of for a third top in a triple top to be higher than the first two. The tape shouldn’t be ignored but neither should the myriad of signals running counter to the tape.

Of course, I could be wrong. I’ve been early to the short party before, and I took a couple lumps to my account and ego for being a wannabe, turn-calling notshot. I maintained tight stops so the damage was minimal, but top calling is a suckers bet that continues to be fun to make.

Complacency is the topic du jour around the financial blogosphere and professional commentaries. The VIX pushed under 12, as denoted by the blue line in the following chart. Recently, hitting or going sub-12 tends to be a precursor to a spike in volatility but it is far from indicating a definite, imminent move.

Many commentators and “experts” have been turning to more esoteric signals to ensure that the S&P 500’s new highs are a “legitimate” breakout in a positive trend. For the record, I happen to really enjoy and appreciate the consistently insightful commentary put out by the three sources I’m about to list. All the same, have a look at these 3 articles:

1. Chris Puplava – http://www.financialsense.com/contributors/chris-puplava/further-signs-market-bottom-building
2. Bespoke – http://www.bespokeinvest.com/thinkbig/2014/5/30/long-term-vix-chart.html (no mention of unprecedented easing the last 6 years)
3. Tom McClellan – http://www.mcoscillator.com/learning_center/weekly_chart/equity_options_vs._index_options/

Maybe it’s my lack of statistical sophistication or inexperience in professional money management, but these 3 articles seem to be really stretching for evidence that a significant correction is not going to occur this summer and the breakout in the S&P 500 is 100% the real deal. I like to keep things simple, by observing the obvious signals. Market leaders at the time(biotech and small caps) broke down several months ago. Now they’re retracing to perfectly natural Fib. areas before potentially continuing downward which I think will have the effect of finally pulling the S&P 500 with them. Volume is anemic. The VIX is saying, “Wait a second here.” Is it because it’s the start of summer? All sorts of economic indicators have given a red light or at least a yellow light, despite all the cheer leaders. High yield fixed income keeps getting bid higher and higher with no downturn in sight.

So many signals are readily apparent but we still need a trigger. In my last post, I thought that the high yield bond market may be the catalyst for a downturn in the S&P 500, but maybe it just finally gets pulled down with the risk indexes without junk correcting. What will the trigger be? Who knows? It could be anything. Maybe we get some sort of sell-off in another asset class causing a fixed income dash to cash, with the best returns being locked in from their high yield segments. Geopolitical activity may induce fears, although nobody in the markets seems to give a damn about the chess moves conducted by Russia or China. The markets continue to confound even the savviest.

“YEAH, YEAH, YEAH! We’ve heard all this non-sense in your last post! How does this apply to AND what the hell is a “chop & drop?”

Well “chop & drop” is a pattern that is seen typically before major dislocations. John Hussman, Ph. D, who is consistently labeled as a perma-bear and broken clock, generates very good and widely read commentary that does skew to a negative outlook. He just calls it how he sees it based on his extensive research. Everybody’s got an opinion. It’s just a matter of whether you value it or not. I happen to value his commentary, but I don’t base my decisions on how I speculate by any one market commentator. It’s all about taking in as much as possible from as many credible sources as possible to assist one in firming up their own mental picture of the state of things.

Anyways, he put out a piece recently titled, The Journeys of Sisyphus. Have a read if you’re in the mood for some confirming of your bias to your own negative outlook. In the piece he produces several Dow Industrial Jones charts leading up to the major downturns of the last 85 years. For the record, he did not comment on any chopping and dropping in the post. I only reference his work because of the charts. My commentary is in no way affiliated with Dr. Hussman, nor has he endorsed this post in any shape or form.

The first chart obviously displays 1929. In it you can observe the pattern of a notable correction with a recovery into some sideways chop followed by another notable correction leading into a final, euphoric run-up. This pattern of “chop & drop” almost always occurs in the final two years.

Before presenting the rest of the charts, I am fully aware of the human brain’s abilities in the area of pattern recognition. It’s one of the distinguishing factors of our intelligence as a species, and is a key differentiator from the unevolved brains of other species as well as machines…for now. These set-ups could just as easily be illusory conjunctions of patterns established by a biased mind attempting to create the ability to foresee market outcomes. In other words, I could just be full of it. Believe me, I get that. I’m still going to present the rest of the charts and you the reader can establish your own outlook.

Here in 1972, we have the “chop & drop” but with a pseudo final run-up to sort of fakeout speculators. Compare this to 1929 where the chop went right into the final drop.

The action in 1987 lacked an initial heavy drop and recovery into the chop. Instead prices consolidated(or chopped) until that first drop before the extremely euphoric run-up prior to Black Monday.

Finally, we’ve reached a time where a majority of readers may have actually had some money in play. The bust that started it all for a lot of us, the Dot.Com bust.

In 2007, the action was tight with the chopping and dropping occurring in less than a year. The outcome was still the same, a mega bust. In fact, if you think about the action of the dislocation it was kind of tight, too. All the action was essentially squeezed into 2008. Yes it began in November of 2007 and bottomed in March of 2009, but the real gut wrenching, heart breaking action occurred in 2008.

And finally we come to the present, 2014. Now remember this whole exercise is pure speculation, but what I think we saw in that 6% correction in February was the first drop. We already recovered and have chopped along since then. At some point in the summer we could then move into a more serious drop of at least 10%. I suspect this may signify the last major drop before recovering into the final euphoric run-up which could last into 2016 before a major dislocation.

Of course I run the risk of being wickedly wrong. But as I provide these posts free of charge and I do not manage money professionally, I’m ok with sticking my neck out and assessing the cycles of fear and greed as such. There’s no career risk. As for reputation risk, I’ll wait till my small following of readers can no longer be labeled small before I worry about my street cred.

Just for kicks, here’s some statistics and notes regarding the Triple Top pattern from forex-tribe.com. It’s a good site to use for a little education into basic technical analysis patterns. However, they do not list where they obtained their data and how it was quantified. I was reluctant to even share it, but it’s just for kicks. If you’re relying on old school patterns without quantifying risk and reward ahead of time, well then shame on you.

Alleged triple top statistics:
– In 85% of cases, there is a downward exit
– In 50% of cases, the target of the pattern is reached once the neckline broken
– In 84% of cases, a pullback occur
– In 85% of cases, there is a pursuit of the movement once the neckline broken

May closed out at a one-year high for the S&P 500. This is a very, very infrequent event; which is why the cliché “Sell in May and go away” even exists. Don’t be surprised if May selling just gets pushed back to June and July. Do not take your eye off the ball for any reason out there if you’re aggressively trading. For you long money players, take some time to consider the charts we reviewed today.

Don’t discount that sovereign debts are at all-time highs across all the developed nations. Don’t discount that every major economy is monetizing debts or manipulating currencies via swaps or taking some other related action to sway economic activities. Don’t discount that credit derivatives exist in the hundreds of trillions with multiple collateral lines traced to multiple counter parties amongst the holders of said derivatives. Don’t discount negative GDP reads in developed nations. Don’t discount anything. Nothing is what it seems in the markets anymore and it could pay big to be prepared well in advance of what historical price action has already told us.

I’m signing off but before I go, the biggest laugher of the week has to be that Italy and Great Britain are including prostitution and illegal drug sales in their respective GDP calculations. Seriously, you just can’t make this crap up anymore. Good day.