Becoming Cautiously Optimistic

We are starting to see some good earning reports out of the usual candidates.  ISRG and CMG have both blown away estimates yet again and rallied strongly in the aftermath.  ETFC has finally become profitable. We may see a very strong rally in ETFC in the next few days.  I may jump into that position again.  I say I am cautiously optimistic because the DOW has not yet crossed the 10700 mark.  We should flirt with that level next week and see if the bulls have the stamina to hang on and push thru that level. 

Short term options (really short term)

This is a very interesting development for option traders.  The CBOE has added weekly option contracts on individual stocks (known as Weekly's). Because of their short term, Weekly's may be cheaper to use and may provide investors with increased short-horizon opportunities for trading.  This could help investors take advantage of market events, such as earnings, government reports and Fed announcements.  For example,  Weekly straddles may be cheaper to play than monthly's.  New weekly contracts are released at the market open every Thursday and expire the following Friday at the close of the market.  Currently only a limited number of stocks have weekly options, but that list should continue to grow each week.  For a current list of stocks with weekly contracts available for trading visit http://www.cboe.com/publish/weelkysmf/weeklysmf.xls.

Not quite sure where to get latest pricing info on these since yahoo finance is not showing these options on their options page.  Check with your broker about the availability of Weekly's.

Of course, do not assume that the Weekly's will be cheaper than the Monthly's (they should be), or significantly cheaper enough to warrant using over Monthly's.  Until they start getting more wide spread usage, tread with care, please.

NetFlix Adventures - 07-23-2010

With NetFlix earnings about to be announced on 07/21/2010 after hours, an analysis of the chart showed that the stock was way extended.  However, there was quite a bit of bearish sentiment on the stock showing a high short interest.  I wanted to buy puts on the stock, but didn't like the prospect of a short covering rally that could take place if NetFlix beat their earnings.  So I decided to try out a Long Strangle.  A Long Strangle is a strategy where a long position in both a call and a put are opened but at different strike prices.  The maximum risk is the cost of the call and the put.  The maximum profit is unlimited on the call side and from breakeven ot $0 on the put side.  The stock was trading around 120.  I bought an August 115 put for around 5.70 and an Aug 125 call for 6.30 resulting in a net cost of $12.00 for the trade.  With the stock up almost 200% in the last year, I was expecting either a strong short covering rally or a fairly big drop if the company missed its earnings.  Please note that the premiums on the options are quite large so the market was expecting a similar move and taking the uncertainty into account. 

After NetFlix announced their earnings, they narrowly missed the wall street estimates (despite posting a 27% increase) and the stock moved down.  By the middle of Thursday, it appeared as if I would end up losing money on the trade since the call value had plummeted but the put had not yet generated enough revenue to offset the loss from the call side.  But the stock continued down and I was around break even by the time the market closed.  I was able to close out my put position for around 13.45 this morning resulting in a profit of 1.45 for the trade (not much really).  But I still have my call that has until Aug 20th to expiration and is worth about 0.75 right now.  I may, however, hold onto it, to see if we get a rally in NetFlix and I might be able to get a little bit more money out of it.  All in all, about a 12% return over two days (not counting my trade cost of $4 roundtrip) but it did cause some anxiety :-)   But I wanted to get comfortable with this strategy so I chose to dip my toes in the water at this time.

$INDU update - 07-18-2010

The DOW has managed to climb back above 10,000, but the last two days have seen the bears take hold of the market.  The charts are looking quite bearish as the moment.  The market must break the pattern of lower highs and lower lows if the trend is to reverse.  The bulls are looking for any positive news that can help reverse the trend, yet it seems as if every rally is another opportunity to sell.  I continue to stay in cash for the time being and watch the market for signs of reversal or an opportunity to go short if critical support levels are breached.

$INDU update - 07-12-2010

Let's take a look at what has happened in the last few days.
The DOW has rallied off the bottom strongly after reaching a severely oversold condition.
The daily chart of the DOW is fast approaching an over bought condition.  We may still have a few rally days left in the market, but its time to be careful. 
The weekly chart of the DOW shows that the DOW has still not broken thru the downtrend line. We are currently sitting at this line.  We should know soon whether the market can break thru this downtrend line or be rejected from it.  Also, last weeks volume was lower than previous week (granted it was a short week due to the holiday).  A rally on lower volume generally does not signal a trend reversal.  However, the fact that the market did not sell off after a good week is an encouraging sign for market bulls.  Maybe the market is taking a breather for now before testing resistence at 10600 level.

The monthly chart is still indecisive.  We will have to wait and see how things play out.

I will continue to hold me cash positions for now and see which way the market will head.

$INDU update - 07-07-2010

Strong rally today.  We have crossed back over the neckline.   If this holds in the weekly pattern, we could have a failure of the head and shoulder pattern.  A failed head and shoulder pattern is very bullish, meaning most of the sellers have already exited the market.  So we could now have a strong rally.  I would closely watch the 10,000 level for the DOW to see if we can continue to hold above it (the DOW broke to the upside in the last half hour). If we can hold this level you can easily see a rally to the 10,600 vicinity.   At least a good short term money making opportunity.

$INDU update - 07-05-2010

On Friday, market looked like it was going to hold and make some kind of rally (which I found quite surprising since I thought people would not want to hold long positions over a long weekend).  But in the end the sellers took over and the market closed down.  We now have a definitive break of the neckline of the head and shoulders pattern.  This is very bearish for the market.  I would expect the market to not drop a lot immediately.  It should drop a little (maybe hit the target I mentioned in an earlier post around 9500).  I would then expect a rally back to the neckline around 9850 give or take a 150 points.  But 10,000 is the real test.  If the market cannot break back above 10,000 in the next 3-4 weeks, I would expect a large drop in the market to follow.

Even if the DOW makes it to around 10,650, its still now out of the woods, since that would show the formation of a monthly Head and Shoulders formation.

Again, all we can do is watch and continue to stay out of the market for now.  The big decision will come if the rally takes us back to the neckline.  I may be tempted to play the market short at that time.  But there is old wisdom "never fight the Fed" and we know that the Fed is doing everything it can to help the economy along.   We will pay for the rescue in the long term but betting short term against the Fed can be scary.  Unless I am convinced that a big drop is coming, I am likely to just stay out of the market and maintain my cash posture for now.

With the European and Asian markets posting losses on Monday,  and the precious metals index ($XAU) showing weakness and a potential top, there is much to be worried about.  A weakness in precious metals could signal investor expectations of deflation which could push the economy back into a double dip recession.