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From the desk of John Thomas The Mad Hedge Fund Trader Friday, June 03, 2011
I am going to use the huge spike down in oil prices this morning triggered by a disastrous May nonfarm payroll report to take profits on my short position in the oil ETF (USO). Specifically, I am selling my August $37 puts at $1.60, the price I am seeing my screen. The (USO) itself is now trading at $38.90.
I initially bought these puts on May 16 for $1.55, when oil was at $100.50. Within days, crude fell to $95.50, boosting the puts to over $2.00, and I should have taken profits there. But I didn’t.
Crude then rebounded to $103, knocking the puts back down to $1.00. This morning, crude is back down to $98.25, a dip of $2.50 since I started this trade, and the puts are essentially unchanged, the profit entirely eaten up by time decay.
That is the lesson with trading these out of the money options. You have to grab the profits when you can before they go up in smoke. The August options only have 2 ½ months left in them, and time decay is starting to accelerate.
For the notional $100,000 portfolio with a 5% weighting, I am booking a profit of $160 (32 X $.05 X 100). This amounts to a 3.2% profit on the position, which adds 3 basis points to your annual return. I’ll be using the next serious rally in oil to reestablish my short, given the dismal economic prospects we are now facing.
Crude oil was lower overnight and trading below the 20 day moving average crossing at 84.15 as it extends last week's decline. Stochastics and the RSI are bearish signaling that sideways to lower prices are possible near term.
Closes below the 20 day moving average crossing at 84.15 are needed to confirm that a short term top has been posted. Closes above the 10 day moving average crossing at 86.07 would temper the near term bearish outlook.
First resistance is the 10 day moving average crossing at 86.07
Second resistance is last Thursday's high crossing at 88.63
Crude oil pivot point for Tuesday morning is 85.04
First support is the overnight low crossing at 83.56
Second support is the 38% retracement level of the August-November rally crossing at 82.44
It’s been a wild ride the past few days OptionsX, Obama and FOMC comments. Seems like everyone is waiting to see what the market is going to do going forward at this pivotal point…
Since the market topped in April and has since been trading sideways in this rather large range, everyone has small positions at work but waiting for a decisive move before fully committing to one side. There could be a few opportunities in the coming days using bonds, the dollar and the SP500 if all goes well which I explain below.
Lets take a look at the charts.....
SP500 – SPY ETF, Daily Chart
There has been a lot of talk about a sharp rally if the SP500 could break the 1130 level or the neckline everyone is talking about. Well this week Obama was on TV and the market rallied into that, then again after. I don’t really thing investors or traders were buying things up as he said the same boring stuff he always says without anything new. I feel there could have been another force at work, which we can discus another time .
Anyways, the market pierced those resistance levels and I’m sure a ton of traders have switch their view on the market from bearish to bullish. While I prefer to trade with the trend I can’t help but feel this market is still range bound, which is why I am still bearish at these shakeout levels. The SP500 did break resistance BUT the following candle did not close above the breakout candles high to confirm the move.
That said, the market is now trading back down at support and the next couple of days I’m sure will shed some like on the direction.
20 Year Bonds – TLT Fund, Daily Chart
We have seen the bond price pullback in a bull flag formation. It touched support before bouncing to break short term resistance as it looks to have started another rally. The chart below overlays both the candlesticks of the bond price and the SP500 which is the white line. You will notice they have an inverse relationship. If bond prices continue to rally then lower SP500 could start to rollover.
US Dollar – UUP Fund, Daily Chart
The dollar has fallen sharply the past 10 trading session and it looks to be oversold for a couple reasons. The past couple days the price has dropped straight down and gapped lower. This recent drop has reached a gap window which will act as support and could provide a tradable bounce in the coming days depending how things unfold.
In short, the SP500 is flirting with resistance and has yet to confirm the breakout. Bond prices look to be headed higher which will makes me think equities could start to sell off any day now… It’s also important to note that the big banks GS and JPM shares have been under pressure and they tend to lead the broad market. Another point to add is the fact the oil has not rallied even though the dollar dropped like a rock? What happens if the dollar bounces? Could oil finally start its next leg down?
Gold and silver continue their steady grind up. The price action reminds me of the 2009 Nov –Dec move. Once that train de-rails its going to have a sharp correction…
You can get my ETF and Commodity Trading Signals if you become a subscriber of my newsletter. These free reports will continue to come on a weekly basis; however, instead of covering 3-5 investments at a time, I’ll be covering only 1. Newsletter subscribers will be getting more analysis that’s actionable. I’ve also decided to add video analysis as it allows me toe get more into across to you quicker and is more educational, and I’ll be covering more of the market to include currencies, bonds and sectors. Before everyone’s emails were answered personally, but now my focus is on building a strong group of traders and they will receive direct personal responses regarding trade ideas and analysis going forward.
Let the volatility and volume return!
Chris Vermeulen....The Gold And Oil Guy.Com
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Whether you are trading stocks, ETFs or futures, technical analysis is the preferred choice for short term traders. Technical analysis in short is the study of price and volume movements on charts. It can be used for studying charts in any time frame whether you are a 1 minute chartist or a long term investor using monthly charts.
Using technical analysis in my opinion really opens the door for a trader to lower his/her overall risk when investing money. I always like to know if the investments I am watching are trading near a critical price level (support or resistance). During these times you can take positions that have very clear entry and exit points for trading. Also it puts the odds in your favor when a position is entered in the same direction of the underlying trend.
Price action is how we make money in the market, so I strictly follow price and volume when trading as they are the least lagging indicator on what the market it doing.
I have put together a few charts using commodity ETFs to show you what I am seeing in the market and what we should expect to see in the coming days.
USO Crude Oil Fund – Daily Trend Chart Oil has slid lower the past 5 sessions and is now nearing a support level. This has me looking for an oversold bounce with the potential to rally much higher. I am keeping an eye on this for any possible low risk setup.
UNG Natural Gas Fund – Daily Trading Chart While UNG is not a great intermediate and long term fund to invest in, I do find it trades very nicely for intraday and short swing trades. I am neutral on natural gas for the time being. It could go either way from here and I’m not willing to take on a 50/50 probability trade. Let’s wait for something exciting to form.
Commodity Trading Conclusion In short, gold and silver have been underperforming the market recently which is not what we want to see. They have led the market higher all year but are now taking a breather.
The way I see gold, silver, oil and natural gas is that they are trading below their recent highs and still have more room to fall before landing on a solid support level.
The stock market is now over extended and looks ready for a sharp correction. If this happens we will see commodities drop and test lower prices also.
There is not much we can do right now other than protect our current long positions by tightening our stops. Depending on the strength of the breakdown, there could be a great opportunity for short term traders (60 minute chart traders) to make some quick money. I expect a sell off which will last 3-5 days at the least.
