Dorm Room Daytrader

April 2, 2008

Follow-through day on April Fool’s rally.

Filed under: Trading — naufal @ 11:06 pm
Tags: , , , , , ,

Yesterday’s rally was one of the few big positive market stories of the last few months. It caused a lot of bullish sentiment that trickled into today’s follow-through day. The rally came on low volume, however, and by no means are we out of the water just yet.

Still, the April Fool’s rally was significant in that it broke the three-month-long downtrend. This also came after a double bottom, with SPY testing the 127 support level twice since the start of 2008. The rally and subsequent follow-through were on low volume, however, and there’s resistance in sight at the SPY 139 level.

The most bullish signal of all for the follow-through, however, is the fact that one occurred. All of the big rallies in the past few months have preceded big down days that erased much of the gains. Not so today.

I still think there is downtrend action left to occur and that the market has not bottomed quite yet. But this is a sign that good days are possibly in sight. Once volume retires to rallies, uptrends and hot charts will come with.

For now, though, I will look to be short, anticipating a retracement soon, with people taking profits, something that the follow-through showed had not been completed. The 50 day moving average should provide good support short-term for the market, so I’m also anticipating a retracement to that level. Most importantly, however, I believe new economic data and the Bernanke speech have yet to be priced into the market.

Here is today’s SPY chart:SPY 4-2-08.

So I’m bearish for tomorrow and will be looking to short stocks and buy puts. I am specifically looking at buying puts on BK (Bank of New York Mellon). With a huge sell-off today on monstrous volume, the chart looks bearish enough, but issues are compounded with its 200 DMA approaching its 50 DMA on the bearish side. Stochastics are around 35, so it still have plenty of room to fall before it’s oversold.

Financials in general will be a focal point for me tomorrow. SKF (UltraShorts Financials ETF) is one of my favorite bearish financials plays. It attempts to mimic double the inverse of the Dow Jones Financials price movement. I will be looking to buy calls on it tomorrow.

On a bit of a more speculative play, I will be looking at shorting/buying puts on IIF (Morgan Stanley India Invest Fund). The 200 DMA just crossed the 50 DMA today downward, as the stock bounces off a resistance level tested four times now. I’m looking for a big sell-off tomorrow on high volume. There is a possibility of an early morning spike beginning tomorrow, considering its late-day rally today, that I will take into account.

A microcap play I’m looking at is HYTM (Hythiam). After an exponential surge the last three days and up 22% today, it looks like this is just another microcap runner. It is down 9% after hours and I will be looking for a quick 10-15% gain by shorting it tomorrow after a possible early morning spike.

Feel free to post comments, everyone.

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4 Comments »

  1. The SKF calls are difficult to buy/sell since the spread between the bid and ask is too large.

    Example SKFGT 7.10 · 9.30

    Why not buy other fiancials’ put, such as MER/LEH/GS/MS etc

    Good luck

    Peter

    Comment by Peter — April 3, 2008 @ 1:16 am | Reply

  2. Good observation, you’re right, I might have to stay away from the options play for SKF, we’ll see for sure tomorrow if the spread remains that large. I will probably also go long on the stock itself. I usually don’t mess with ETFs because it’s usually more effective to target specific stocks in the ETF’s sector to focus on, but I like UltraShort ETFs like SKF because they allow me to go long on short positions. Because of the asymmetry of losses, a short position cannot net you a larger gain than 100%, while the potential for loss is infinity. The opposite is true with long positions, as you can’t lose more than the value of the stock (100%). I like how SKF and other UltraShort ETFs allow me the potentials of long plays by going shorts on specific sectors for me.

    Puts on specific financials is a good idea, though. As I said, I will definitely be looking at BK (Bank of New York Mellon), but C (Citigroup), LEH (Lehman Brothers), and GS (Goldman Sachs) all also look attractive. LEH actually had a down day today, so tomorrow could be a great day for puts.

    Nice call, Peter. Good luck trading.

    Comment by naufal — April 3, 2008 @ 1:23 am | Reply

  3. Hello naufal,
    Thanks for the blog even though brand new, You did shed some good light on today’s BK trading. I have been following the stock and consider it a pretty good play seeing that unlike other financials it has not hemorrhaged due to the credit crisis. Well, apart from the 200/50 DMA, What other tech. analysis tools are you using to spot trends in this stock and what would be a good re-entry price for BK? Thanks

    Comment by Angelo Kweli — April 4, 2008 @ 10:18 pm | Reply

  4. In the last 60 days, BK’s most important support level has been around 42.50 and a late March downtrend broke through that support. The day after I posted my trade idea, BK mainly consolidated a bit with low price movement, and eventually broke through downward toward the next tested support level, at 40.50. Trading closed at 40.68 today so it worked exactly as planned. Breaking support coupled with the DMA cross set up a perfect short-term short position.

    As far as reentering long, I can’t give you a price target because this stock hasn’t really been “trending” per se in a few months now. Lots of erratic, volatile behavior with no distinct up or downtrend. This is a result of a lack of institutional investors, who make up 75% of market transactions and are the defining force behind trends. I’d wait for BK to fall a bit more or at least test its current support level to show that it’s reached a relative low and then for a surge through the 42.50-43.50 support/resistance level I mentioned earlier. Only then would I even consider going long. if BK drops even more (which I find highly possible), I’d wait for newer support and resistance levels to develop and trade accordingly. The main theme in all of this is waiting for a trend to develop and buying at predicted dips within the trend. Right now the market as a whole isn’t even trending as much as it is consolidating, mainly, like I said, due to a lack of instutional investor involvement. Wait for volume to return to the market, with it will come a defined trend to trade on. You mentioned BK’s immunity to the credit crisis. Whether or not that is factored in to the price or is relevant to BK’s price movement is a question of fundamental analysis that I don’t mess with too much. I will say though that I think the credit crisis/financials play is increasingly less attractive, as banks fall on high volume and the credit crisis is priced in more and more into financials. So whether or not BK can surge based on that bit of information is a question I cannot answer with the least bit of surety. Hope that helps.

    Comment by naufal — April 5, 2008 @ 4:14 am | Reply


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