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.

20-Day 30-minute Candle Chart with Trendlines and Historic Resitance. 

 

The QQQQs Fund is seen here to be finding support in the lower trendline from July 21st of this summer’s sharp rise.  We can also see tha the QQQQs made a run at the 43.31 high from January 1st, but could not maintain the high ground.  The Trendline from July 21st was an especially important line of support over the past week.  It held the Qs up a good three times.  The price also bounced against 43.31 twice, and even broke through briefly.  It looks like we are coming to a turning point for the Qs as the Summer Trendline approaches the Resistance from the winter high of 43.31 on January 14th.

Here’s that illustration I was hoping to provide:

 

 

Click for a full size image.

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.

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.

The Kondratieff cycle is a long cycle, typically lasting 55 to 60
years. It was discovered in the 1800s by Nikolai Kondratieff. I’ve
been reading about it in John Murphy’s “Intermarket Analysis” lately.
Today I reread part of his discription on it.
Part of me thinks that these cycles can’t really be correct. It seems
unlikely for there to be such recognizable and repeatable pattterns.
However, this particular pattern has proved correct over the last 250
years. If the data supports it, I should have a hard time refuting it.
I have heard that there are issues with whether these long term models
use an inflation adjusted stock index. When I was reading Frost and
Prechter’s “Elliot Wave Principle” they mentioned that some of the
elliot patterns were more recognizable under the inflation adjusted
Dow.
Doubts aside, the Kondratieff cycle calls for a “winter” declining
period starting in 2000 and lasting upwards of 10 years. One of the key
markers of winter is deflation, which I’ve read was experienced in
2000. The next marker is falling commodities prices. I’m not sure if
we have those yet, but I’m going to keep this theory in the back of my
mind.

I’ve been reading more of John Murphy’s “Intermarket Analysis” book
lately. He has a couple chapters that discuss various business cycle
theorys and what they mean for the financial markets. As I understand
it, the idealized behavior is this:
1. Bond prices rise
2. Stock prices rise
3. Commodity prices rise
4. Bond prices fall
5. Stock prices fall
6. Commodity prices fall
Steps 1, 2, and 3 are part of an economic expansion. Steps 4, 5, and 6
are part of an economic contraction. The expansion is positive growth
and the contraction is negative growth. The time between steps 3 and 4
is when the economic growth actually turns negative, but it is decling
from the middle of step two to the midlle of step 5.
So, having read this theory on the business cycle and it’s relation to
financial markets, I’m going to try and plot our position in the steps.
Everyone who’s paying attention to the stock markets can see that we’ve
just experienced a major downturn. We also know that commodity prices
were soaring during this downturn. The commodities were corrected as
well if I remember correctly but I think they are still heading up.
This last week was a great week for the Dow, Naz, and S&P, but are
stocks done falling?
I think bond prices have been falling because yields have been
increasing. I think this means we are somewhere around step 4, which
would nake this an early recession. If that’s true we should see stocks
and bonds continue to fall over the next months. Commodities should
join the fall eventually as well.

I’ve heard that the Nikkei is a leading market for the US.  This seems to confirm what the moving averages are showing, today should be another big up day for the US markets.  Since Japan was up about 200 points, 1.3%, I would make a guess that we’ll be up more than half a percent today as well.  I haven’t been following the Nikkei as related to the US markets until now though.  So we’ll see!

Trade Journal Qs 20060724, originally uploaded by Gare and Kitty.

If you can see the little yellow circle on the left side of the peak, you can see where I entered a position in Qs puts around 1130am. I watched the market on and off until about 1320 (120pm). At that point I felt content to walk away since the Qs had fallen through two lines of support and was channeling nicely. However, today I was to be fooled by the market once again.

You know, I have a habit of really putting in the time to analyze the market AFTER I trade. For example, the past two blog posts about moving averages. I was also unequipped to use the nastick and nastrin indicators during the trade. I simply forgot how to interpret them. I also didn’t look at the first hour trading range. I did trade based on the daily pivot points though. I bought in when the Qs were at 36.19.

So today was a huge up day. I thought I was buying just after potential top of the day. It turned out the just after I left the chart, the Qs broke through the trendline channel I had drawn. Totally blindsided. My only consolation is that the weekly moving averages are still moving down in parallel.

Also, one of the last things that I saw on the Darlene Nelson videos I watched was that the at the money options have the highest implied volatility.  This contributes to an options price.  She sad that the implied volatility is highest in the options at the money.  As soon as the price of the underlying instrument, in this case the Qs, the implied volatility goes down and some of that value is lost.  In this case the option I bought was at approximately 24 when I purchased it. Now its at about 21.

This is the Qs with Simple Moving Averages (SMA) of the 5 and 8 week period over the past 9 months.

The 5 week moving average moved under the 8 week moving average in the week of 5/8 (5/11 Bernake scared the markets). The spread between the two averages moved a bit closer around 6/12 to 7/1. This was temporary though, and the spread widened again.

There was significant upward movement in the Qs today, more that 70 cents. The weekly moving average, however remains unchanged. I think this is because the the week has just started, and so hasn’t been included in the average yet.

However, the trend still looks to be downward.