I meant to post a couple times this past week but just haven’t gotten around to doing so…but I do appreciate the comments you peeps have left. I do reply to all your comments and emails (so please continue to do so), in fact I tend to leave market updates and strategies under the comments section. And hey, 15 comments in my last blog article…great work! Keep them coming!!

Today’s post is going to be a short one, but a post is better than no post, right? The markets are looking horrible, it is likely we will see further danger to the downside. A short relief rally tomorrow morning is possible but if we follow through and close below 800 on Wednesday that’s a sign of bad things to come. We’ve been getting lots of mixed reactions to news…in situations like these the overall trend trumps everything and the path of least resistance still continues to be lower. Today’s bearish action pretty much eliminated all bullish arguments…take a look at the S&P 500:

We broke out of our symmetrical triangle today. As mentioned before, a break below 825 would lead to much more downside. Other important support lines include 800 and 750. Today’s break below the 800 level could easily lead us to 750 in the coming days. If you haven’t read my previous post about a potential bearish pennant, you should! Cause it is looking more and more like one as the days pass. A push lower to 750 forms a double bottom…this may sound bad but really it isn’t…double bottoms are usually a reversal pattern. But for the time being, I’m going to stay away from picking bottoms…speculating bottoms is a losing game.

Happy trading!…and don’t forget to check out HY Markets and all my other sponsors!! Thanks again to all those who have subscribed to my feed/newsletter, it means a lot!!!

Richard
richard[at]hedgeagainstspeculation.com

I hope you’ve all enjoyed Dylan’s guest posts. It’s an honor to have him on Hedge Against Speculation, but I think it’s time for me to update you all on what I’m seeing in the markets. Patterns are developing as I write this article but before I go on to details I’d like to thank my newest sponsor HY Markets. Without my sponsors I would not be able to continue with this blog so please support me by checking them out! Other means of supporting H.A.S. include commenting on my articles, subscribing to my feed and simply spreading the word about my blog :)

So today is Monday, February the 9th and I’ve decided to blog while in the middle of the trading day…in fact I’m doing a few day-trades as we speak. As mentioned in my previous post, we are forming a symmetrical triangle.

This triangle can break to either side but the weekly charts tell me that we are more bullish than bearish. We haven’t gotten to our year’s highs yet, but it is looking much healthier. In fact the NASDAQ is up for the year! Buyers controlled all of Friday and I suspect they will do the same today. If we do infact break out of our symmetrical triangle, we will most likely slow down at 900. I suspect we will turn around at around 900-925 BUT if we pop through this mark the bulls are in full control. I will go as far as calling this a bottom if we do in fact pop through this important level.

But do we really have a symmetrical triangle or just a bearish pennant?!? Remember folks, the path of least resistance is still down. So what is a bearish pennant?…take a look at this picture:

A pennant is considered a bearish signal, indicating that the current downtrend may continue. The big picture indicates that we may such a pattern. After a strong volume decline on negative fundamentals, we’ve been getting weeks of narrowing price consolidation on weaker volume. This typically follows by a second sharp decline on strong volume. 

Keep these patterns in mind when you trade this week. I will add some charts later tonight to give you peeps a better picture of what is happening in the markets.

Richard
richard[at]hedgeagainstspeculation.com

Hello all.  This is Dylan, the infrequent guest writer on Richard’s site.  I just want to write to both promote my own site (http://bulldodger.blogspot.com) as well as enhance the general community on trading and investing strategies.  I recently posted an article on my site highlighting my exit from a trade in EQ and entry into a trade in KALU.  But KALU recently had a move that I look for in a stock that provides a short term small scale profit on a position using a covered call or debit spread strategy.  Let me start from the beginning.  One of the things I like about this stock is that the current trend is linear relative to the diagonal support. A stock like this provides a good opportunity to make short time profits by writing a covered call against a stock position or selling a short dated option to create an option spread (if I was long a call option to begin with). When I do this, I look for stocks that I think will continue in the current overall direction based on strength of support areas. I generally like to do this in stocks that have a relatively low level of volatility. While lower volatility implies a lower option premium, it allows for my strategy to be more effectively executed. Here is what I do. In a bullish stock where I have a long position, I like to sell the nearest out of the money call in the current expiration month. For KALU this would have been the Feb 30 Call. In this case the trade would have brought in a premium of about $90 per option contract if I had sold the call on 1/28/09 when the stock began to show some weakness. I then hold the option until it makes a higher low near support. At this point I rebuy the call (close the position), locking in a profit of about $60 per option in this trade.

The reason I trade the nearest out of the money option is because I want to leave myself room incase what I perceived to be a higher high is just a hitch in yet a larger movement. In this case, the 30 call would have given me just over $2 of reaction time should the stock move higher and I wish to hold onto my position. Plus, options near the money have the highest time value, which is what I am trying to lock in. The reason for selecting the nearest month is because time decay occurs at the highest rate in the final month of expiration. So not only will the option lose value as the stock declines, but it will lose value as the month wears on.

The major difference between a covered call and a debit spread creation is that in a covered call you own the stock where as in the spread you own a lower priced call. In the trade above I locked in a profit of $60 per option that can be deducted from the total price of the long position. This may not sound like much. If i bought 100 shares at the break out above 24 on 1/23/09, i would have spent roughly $2400. In effect I am reducing the total price to $2340 by the end of this trade. Conversely, if I had bought the $25 call upon the breakout, I would have spent about $2.50 per share, or $250 per contract. In this case, I would be significantly lowering the total per contract price of the initial call position (2.5-.6=1.9 and 2.5-1.9/2.5 = .24 or 24% reduction in total cost per long contract.) I have indicated with the big blue arrow where the call should have been sold, and indicated with the big red arrow where it should have been rebought to close the trade.
Be sure to check out my site at http://bulldodger.blogspot.com for other trade ideas and analysis.

Happy trading- Dylan

Howdy all.  Im writing in as a guest writer just to post a couple ideas that I see for some bullish trades.  Before I get into my post let me shamelessly promote my own blog  http://bulldodger.blogspot.com .  The two trades I will highlight are Peabody Energy Corp., BTU, and National Information Consortium, EGOV.  Both of these are examples of a pattern called an ascending triangle.  Just what are ascending triangles and how are they evaluated?

Ascending triangles typically occur in up trending stocks.  The price rises to a level of resistance (point A the chart).  At this point, sellers begin to take control.  These sellers may consist of bulls taking profits off the table as well as bears selling shares short.  Both combine to produce an excess of supply, causing the stock to turn down. The stock falls until buyers begin to step in, either bulls taking on a position or bears covering their shorts.  Either way, the new low is higher than the previous low (point B).  The change in excess supply to excess demand causes the stock to rotate back up.  As the stock nears the level of the previous high (point C), sell orders again cause the stock to turn.  The key is that the previous high is met but not exceeded.  This indicates an large sell order may have been placed at this level, as some strong force is obviously acting to repress price movement above this point.  This sell order may be a limit order placed sometime in the past.  And each time the level gets hit, some, but not all, of the sell order is gets exercised.  As the stock falls towards point D, rising momentum in the bulls causes a new lower low to occur and turns the stock’s movement from down to up.  This time, however, the sell order that was present at the previous high (points A and C) may be deminished to the point where it no longer has the size to deminish the upward momentum.  As a result, prices often explode through this level (point E).  The price target in such a formation is calculated by subtracting the value at point B from the value at point A, and then adding that difference to the price level that reacted as resistance for points A and C, or the breakout point at E.  Also, the amount of time that it will take for this target to be reached is roughly equivalent to the horizontal length of the ascending triangle.  Like all triangle and wedge formations, I think of Ascending triangles as being a build up of tension in the market that is reflected by the rising lows.  The conclusion of which can be a dramatic change in price.  
 

As an example of a successfully broken Ascending triangle, here is the stock EGOV.  This stock had been forming an ascending triangle over the past month, and today broke out, rising 10% from yesterday’s close, and about 8% from the resistance line.  Though I missed the train on this one, I may buy back in if it pulls back to the prior resistance level, which would now be acting as support.

An example of an Ascending triangle still in the process of forming is BTU.  The resistance level is somewhere in the $28 to $28.50 area.  The rising lower trendline illustrates the rising lower lows.  At some point this formation will break.  While it is not guaranteed that the bulls will win out, they are often favored in such a formation.  The conservative trader will take a position upon a breakout above resistance (say at 28.75).  With a price target of about $36, this still leaves plenty of room for profit.  More aggressive traders (like myself) will take the trade in anticipation of the breakout.  The trade off is that the aggressive trader accepts a lower probability of success for an increase in profit potential.  As long as I place my stops well, it’s a risk I am willing to take.

Be sure to check me out at http://bulldodger.blogspot.com .
Happy Trading- Dylan