Friday, February 26, 2010

Update: IYR Wolfe wave bearish

Earlier today I presented a trade set up. So far, so good:

IYR Bearish Wolfe Wave

Monday, February 8, 2010

SPX Elliot wave targets

Eric wanted me to explain my crazy thought process on Elliot waves.

There were two potential Elliot Wave scenarios until recently; now the only valid one is the white lines and numbers below. I'll keep the green lines and numbers in only for argument sake and I'll explain why this isn't operable anymore after the chart.

The white lines show Wave 1 from Jan high to Jan 29 low of 1071.59 (that was a key level to remember, hence the red line.) We swung up for Wave 2 and then rolled over into Wave 3.

Wave 4 could be no higher than the 1071.59 level from Jan 29 or that would have violated the Elliot Wave mechanics. I know this sounds weird, but it works nearly every time: Wave 4 cannot swing higher than the lowest point of Wave 1. This is why I was stalking this level so closely today looking for a short entry... and it happened at around noon when it began to roll over.

For a while I was thinking that the green numbers were operable, but this was violated on Feb 2 when Wave 4 creeped above the low of Wave 1, so that told me that Wave 1 extended down to were (3) is and we were actually still in Wave 2.

The Wave 5 target for the white Elliot waves is between 1011 and 1030. Wave 3 cannot be the shortest wave, so Wave 5 cannot go below 1011; a more likely target is 68% of Wave 3, which would put us at 1030... game theory.

Even if this were an ABC (green lines), the most conservative target is a test of the low at 1045... game theory was a target of 1050 for today. We didn't make it, but I had to close out my day trade (TWM long) since I'm away from the computer tomorrow. I set my target for the day on TWM at 27.95 with an entry at 27.42. The 27.95 corresponded to the 2-d vwap on IWM, whcih Brian Shannon had tweeted this afternoon. I thought this would be a good exit since buyers might come in on the 2-d vwap.

I'm still net short with swing positions is RSX (short), FXP (long), TAO (short) among others. Small long positions in XLV, XBI, SYK are my hedges.

Friday, February 5, 2010

Dogs of the Dow

Today I funded my IRA and employed the the Dogs of the Dow. This is something that I had done with regularity in the 1990's with success, but got away from it the last few years for various reasons. The thesis goes like this: The Dow stocks represent a varied cross-section of the stock market and the "Dogs" are those members who are most undervalued using yield for valuation.

Instructions: Take the top five yielding stocks, drop the top yielder since it may have some fundamental problem, then invest one-fourth allocation into each of the next 4 in rank. The ranks will change almost daily and the picks should be held for one year. One variation is to use only those stocks selling below $30 per share, called the "small dogs", with the thought that stocks with higher share price are not as desirable. Since the current four doggish stocks are all near $30, I didn't use this screen.

Therefore, I put one-fourth allocation into each of Verizon (VZ), Dupont (DD), Kraft (KFT) and Merck (MRK), with an average yield of just under 5% which is better than long term Treasurys. In my experience one or two will largely outperform the others, and since it's completely unpredictable a buy-and-hold discipline must be respected.

One unintended bonus: I went long on these four names at 2:00 pm which inadvertently pegged the day's bottom; it's always good when a long term holding gets a 1% gain in the first two hours you hold it. There, now I jinxed the strategy.

Thursday, February 4, 2010

Greece's "hidden debt". Oops.

Hilarious. You heard it here first, folks.

From January 6, I said:

The ECB has stated emphatically that they are not willing to forward any more bailout money to Greece and in response the Greek Finance Minister has said that he doesn't need any more help, thank you. Hopefully what they will be seeing will be reassuring them that indeed we are moving in the right direction and they should continue funding our large debt,” he said. Hopefully? Think about this. What was he supposed to say in response to to the ECB's hard line, Well, then we're bankrupt? Not. The market seems to think this is a bullish statement, up over 4% today... I would be wary.

From today's UK Telegraph:

...a commission of experts in Athens told the country's parliament that it had uncovered €40bn (£35bn) of "hidden debts" during an investigation...

Huh. Who woulda thunk it?

Monday, February 1, 2010

Is Toyota a buy?

Down 12% last week and now rebounded 3.2% on news of a "fix" for the accelerator. Pro: Toyota has a lot of brand loyalty and this is their first significant recall. Con: Toyota is purchased for safety and reliability, not image, and this is a big blow to that brand. Also, macro environment for autos is suspect and it trades at a 24 forward PE, well above competitors.

Daily shows nice bounce... or is it a bear flag?

On the 10-minute, we see a bottoming pattern and gap that could be filled.

Buy above $80, but by macro market view is still bearish.