Gee, Think.

I’m back with another chart of my favorite financial instrument, the NASDAQ 100 trust QQQQ, better known as the Qs!

First of all, I am astounded at the way that they rallied since July 21st. I mean, wow! I thought that the Qs were going to be headed down even further, but no! They really surprised me there! They fell roughly 16.6% from May 8th to July 21st, and subsequently rallied 25% from July 21st to November 24th 2006. That’s an amazing range in 6 months! I certainly didn’t see that kind of recovery coming. However I am relentless, and will try to make another prediction of where the Qs are headed over the next 20 trading days. See the chart below:

Here we can see that the Qs were in a undeniable 45 degree uptrend for a good 4 months.  Two months since November 24th, we are essentially flat.  This means that the trend has died. The angle of ascent has disappeared.  It now seems that the Qs are facing resistance from a  line that was first touched back on April 4th 2001 as the day’s low at approximately 33.83.  On that day it was support.  Since then this line has been resitance on January 20th 2004, December 3rd & 15th 2004, and broken briefly on January 11th & 12th 2006.  It was tested again November 22nd and 24th 2006.  More recently we hit the line again on January 12th and 16th.  Suffice it to say that this line has been significant in the geometry of the Qs over the past years.  It has never been soundly broken since becoming resistance.  I venture that the Qs will not break this trendline.  They have been pushed quite hard over the last 7 months, and I think they’re ready for a retracement to at least the 42.20 area over the next 20 trading days.  However, we can see that the relative strength of the Qs is still respectable at the 58% level.  I see a coming advance to test the long time resistance line hitting at least 45.30 before turning lower.

I won’t have the time to actually trade this, but I’m still considering what options plays would be best based on this opinion of the market.  Deciding which way the market is going is one thing, but choosing the right options strategy is another entirely.  Something that crossed my mind was selling one-point options spreads.  Selling n out of the money a put spread as the Qs turn up from support, and then selling an out of the money call spread as the Qs turn down from resistance.  based on this analysis, I would choose something like the 43/44 put spread and the 45/46 call spread.

Remember, this is not an endorsement, just my own humble amatuer opinion.

Is it too late for my poor QQQUJ options? It could be. I hear that
these last two weeks are really when the time value gets sucked out of
the options. So out of the money options are not really the place to
have your money. Well, all I can do at this point is hope that the
market falls hard enough tomorrow and the day after to see if I can
recover my 8 cent cost basis.
My trading account is hanging in the balance here. If I am able to exit
the position with some scrap of captial still remaining, I will
definitely not buy current month options again. I was really playing
with too short a time frame.
If I end up losing all the money in this position, I’l have to wait
until I’ve done some more saving before I can practice again.
I think one of the biggest lessons to learn is patience. I rushed into
some poor quality options because they were cheap and I was too eager to
play the downside. Now I realize that it would have been much better to
wait until the direction of the market was more certain. Then I could
have profited more from today’s striking 70 cent loss in the Qs.
Instead I’ve lost money in my trade and also in the opportunity to
capitalize on such a dramtic move.

For those of us watching the elliot wave progression in the Dow, S&P, and especailly Nasdaq 100, this rally is a real fake out.  The recent rise in stock prices is part of a second wave up, during which investors believe that the market really could recover.  It’s some kind of denial psychology, or a back last from the exceeding optimism of recent years that just won’t quit.  So we get this uptick over the past couple days, but if my sources are correct, it won’t be sustainable. For more commentary on the “but” rally, read tickersense.typepad.com

Sociotimes.com is mentioned in the Elliot Wave Financial Forecast that
I’ve been reading over the past several days.
From my quick perusal I think that this website is focused on
interpreting the social implications of events. I think the
interpretations there are based on the theory that the stock markets are
barometers of aggregate social mood of the world’s population.
In the “Elliot Wave Principle” by Frost and Pretcher the theory that the
stock markets is a measurement of “man’s progress” is discussed. The
five and three wave pattern of the wave theory is likened to a natural
law that emerges from a wide variety of observations. The tenet that
nature follows the path of least reisistance bolsters the 5-3 numbers
since any lesser numbers would not allow for both progress and
alternation.
So the financial markets are seen as indicators of the social mood of
the world through the elliot wave theory. This sociotimes.com site
interprets events to see what they could indicate about social mood. It
seems like they are looking for correlations between public sentiment
and what the market is showing about our mood. Very intriguing.

I just adjusted my bearish spetember Qs position. My cost basis went
from 0.98 to 0.82. So far the trade has gone like this:
1. 7/24 Buy to open 10 QQQUJ at 1.00
2. 7/25 Buy to open 6 QQQUJ at 0.95
3. 8/3 Sell to close 6 QQQUJ at 0.75 (ouch!)
4. 8/9 Buy to open 7 QQQUJ at 0.60
I’m bearish on stocks in general and the Naz in particular. I believe
there will be significant movement downward over the next four weeks.
To avoid significant time decay, my exit date is September 1st.

The FOMC voted to pause their rate hike citing a slowing economy, but
they asserted that hikes may be resumed if inflation does not moderate.
Well I’m surprised that only one governor voted against the pause. I
thought there would be another quarter point hike. All the same, it
seems like the Qs may fall.
I was just watching the Qs action shortly after the minutes release.
There was one huge sell order, something like 1.7 million shares, then a
bigger buy order for approximately 3 million shares. Whoa! I can’t
wait to see how the tug of war goes. I’m guessing that slowing economy
means poor earnings reports which means contracting multiple, which
means stocks fall.

Today was a typical pre-fed meeting day showing volume around 60% of the
average. To my delight the Qs slid a bit downward, and my QQQUJs
touched 0.75 for the third time in 5 days. I couldn’t bring myself to
take defense action by selling again. I really think the Naz is going
to suffer tomorrow, rate hike or not. If there’s a hike, cash gets more
competitve versus the stock market, which at this point in the hiking
policy could do some damage. If there is no hike then the Fed is saying
that the economy is slowing enough that they don’t have to do any more
damage themselves. Hike or not, inflation is running hot and company
earnings are going to drop next quarter. They weren’t so great this
time around anyway.

Hey it’s Monday! Back to business!
Getiing right to it, I’m still looking for a drop in the Naz. I was
just perusing Robert Holmes’ daily pre-market update as I ride into
Newark. He reports what “seems” to be a consensus on the rate hike
pause. He also quotes a Cantor Fitzgerald u.s. Market strategist as
saying that the market has discounted the Fed’s move already. All
right, is suppose it’s possible that the market has already moved down
enough to prevent a huge sell off if the rates go up, but I believe that
there will be some sharp short term movement in the intraday chart
tomorrow based on what the Fed says accompanying its move. If they are
still hawkish they’ll scare the markets for at least a day. If they are
dovish we should see a rise.
The most interesting part of the pre-market summary was the updat on
international markets. The Hang Seng gained 0.4%, but London’s FTSE,
Japan’s Nikkei, and Germany’s DAX were all lower. I think that means
we’re headed down.

Today the non farm payroll numbers came out. We had only 114,000 new
jobs created last month. This was about 30,000 lower than the
estimates. This information was released around 830 am today. As would
be expected, the market gapped up. It continued to rally until around
1230. Then it started a serious downtrend into negative territory. The
Qs covered 60 cents of movement from plus 30 to minus 30 intraday.
I had opened a position in QQQUJ. That’s the september 36 put. I got
into this postion on the monday and tuesday before last. That’s
somewhere around the 24th. My cost basis for 16 contracts was 0.98.
When I checked the position after vacation, it was worth around 0.55.
Wowza! That really hurt! I saw it move up to 0.75 earlier this week on
movement around the time of inflation data coming out. I did not sell
out at that point though.
Earlier today the position was worth 0.45. When the market was
sufficiently dipped, I sold 6 of the contracts for a 120 dollar loss.
At this point though, I’m trying to reduce the amount of capital I have
working in this trade. If it goes further against me, I certainly
don’t want to lose more than 23 cents per contract. I should never have
lost more than 10.
So I still have 10 contracts out there. I’m pulling for inflation fears
to kick in big time on monday. Then hopefully I can exit at break even
before tuesday.

Some things I read on TheStreet.com:
“The 10 year bond has been rallying”
“September crude jumped 90 cents”
Those facts combined with the strong upward action in the Dow and Naz
today seems a little perplexing. Have traders already forgotten the
inflation data which just came out on tuesday?
Robert Holmes of TheStreet.com quotes Paul Nolte director of investments
with Hinsdale Securities saying “Investors were driven by earnings
today instead of inflation fears.”
Are these really investors we’re talking about? “Investing” in
securities implies that you’re in it for about 6 months or so. I’d like
to see if Adobe, AT&T, and HP are still up after the Fed mEeting next
week, and better yet in 6 months. My guess is that most of the action
today was trading rather than investing. Just a play with positive
momentum while it lasts for the short term.
I’m surprised that oil, stocks, and the 10 year bond were all up today.
I really doubt that will happen again tomorrow. It just seems out of
line with intermarket principles.
Granted, I read this morning that all overseas markets were up last
night, which gives a good chance that our markets will do well as well.
I’m not totally surpised at one up day. Why are the overseas markets of
Germany, England, and Japan all rising as well? That’s a good
question.