Before I go on, let me explain some basics. Bond prices and equities prices move in opposite directions; the prices have negative correlation. Bonds are considered to be risk free while equities are risky.

When risk comes off, the bond market rallies; when the risk goes on, the equity market rallies. It’s simple as that.

Now let’s look at TMF, Direxion Daily 30 Year Treasure Bull 3x shares. Why TMF? Because it has shown some clear negative correlation to the SPY, S&P500 SPDRs. The chart below tells it all. The yellow line is the SPY and the green-red colored is TMF.

While SPY has been hitting resistance at around 110 with the doji which indicates indecision on whether to go up or down, the TMF has been rallying. What this tells me is that there is conceivable risk still lingering in the markets or in the majority of investors’ minds. Also, the equity market has shown tremendous strengh in the last 7 days or so: We’ve come up way to fast.

Although the equity market had some consolidation until late afternoon, we might have to make a higher low at the short term trend to break out of the down trend that we’ve seen since May. TMF chart gives us an insight as to how much. The slow stochastics is signaling that TMF has about to begin another rally. Also, the MCAD is about to signal a buy on TMF.

So what’s the strategy here?

Short the SPY for a week or so. I’m already short HRL; because most indicators line up as I’ve discussed in my previous post, “1-Week Trade: Short HRL!“. My short term long positions that began 6 trading days ago will honor the trailing stops that I’ve setup. My really long positions with a trading window of 8 months that I have nibbled every week or so since the “black swan” event in very small amounts will remain as is such as GS, PKG, KR, QCOM, and DIS.

We’ve had some nice profits over the last two weeks. I wish I had put more money into work when I first saw the turn two weeks ago. But, I should be thankful: It’s a better feeling than “I wish I had put less money into work”.

It’s ridiculous how all charts have the same pattern. Everything moves in the same direction as everything else. But there are suttle differences in sentiment among various stocks or companies.

Today while going over the charts on my list, I noticed HRL(Hormel Foods Corp.). Technically, HRL looks very strong. The current trend is above both the 200 days and the 50 days. Also, the slope on the 50 days is still positive even after multiple capitulation days.

But HRL is right on resistance. Its stochastics is in the over-bought range and is ready for a turn in the short term trend.

So I shorted it at 42.79 with a stop loss at 42.95. I have yet to see any chart that continues to move higher with this type of configuration. It’ll have to go down a bit and make a higher low to go above the resistance. Essentially, we need a volatility squeeze for the price to move above the resistance.

Where’s my target? It’s at around the 20 days or around 41.84. The risk-reward ratio here is 0.18(=0.16/0.85); the reward-risk ratio is 5.31. It means that I have the potential to make $5.31 for risking a dollar. Mouth watering ratio. mmmm ….

If I’m wrong, I’m wrong. The price I pay is $0.18 a share. It’s not bad for a penalty.

Ever since the big drop in January, TTWO has been in my watch list. I wasn’t sure when it was a good time to go in because I couldn’t define any risk or see any type of pattern until two weeks ago. Incidentally, I realized that this is a ascending triangle pattern, a bullish continuation pattern. There’s so many Google links on it. Check it out here. The decreasing volume and higher lows tell us that the selling pressure is almost gone or the people who want to sell have almost finished their selling.

After observing the price movement for about a month or two, I’ve added positions on two occasions at its 20 day simple moving averages or 20 SMA’s: I started one on the 18th and added more on the 29th.

If it breaks above its recent resistance of 10.55 or so, I think this is a strong buy.

If we’re talking about options, the 12.50 calls look really cheap. At the moment of this writing, APR 12.50 calls can be bought at $0.10 and MAY 12.50 calls at $0.20. When it truly breaks above 10.55, you’ll see the values of those options go higher at which point you can either sell for a profit or hold expecting it to go up above 12.50.

Now the fundamentals. There’s nothing much to talk about fundamentals. It hasn’t made any profit since 2008.

HOWEVER, Carl Icahn, the investment maven, can’t stop buying more shares.

FYI, Icahn holds 13.7% of the company as of March 19th.

I think our man Carl will engulf this company but the valuation of a possible takeover remains a question. I’m not sure what his motives are; but, he is an assurance for taking positions at about the same price as I did.

Here’s a trailer on Bioshock 2. FYI, this game is a bit disturbing; but I loved the first one.

There’s going to be selling because money has become slightly expensive. For example, margin trades have indirectly become expensive.

In the markets, I think we might see a small dip and another rise. There’s so much money that people have been saving on the sidelines. There’s cash to be spent on equities. I think some of those money will come in when we test the lows again like the ones we had last week.

You’d be questioning why?

When the velocity of money increases, that means people are spending or money is changing hands faster than before. This hints that our economy is on a recovery path. More spending, more demand, more future inventories, and more raw materials. I feel a faint heat. I think the furnace is heating up once again. Look at Australia as a good example. Look at how its markets are doing despite rate hikes. The US situation is different from China’s. I think US is more attune to what’s happening in Australia.

That’s just my thought … =p

The upcoming Diamer AG’s earnings report got me thinking about Chinese Yuan, metal, and dry bulk shipping. Last year, Diamer reported strong growth in the Chiense market.

First of all we have the following information.

1. Diamer as well as other auto manufacturers reported strong growth in the Chiense market in 2009.
2. High likelihood of Chinese Yuan appreciating
   Chinese holdings of US treasury has gone down enough to make Japan the number one US treasury holding nation. If the Chinese goverment wants to keep the value of the yuan at similar levels, it is going to have to continue to spend the USD surplus by buying US treasuries. Given pressures withinin and outside the country, the country is most likely not going to intervene as much as it has in manipulating the value of the Yuan and as such, we might see further reduction in the US treasury holding in the next few years.
3. Undecided bench mark iron ore price in China
   China wants lower prices but the producers have no reason to; the producers see higher spot market prices. See here.
4. Seaborne iron ore shipping rates are falling. Check out the Baltic Dry Index which measures the cost of dry bulk shipping of various items. BDI is clearly in a downtrend.

Daimler and many other auto manufacturers has built or are trying to build factories in China to meet the local demand. If so, they are going to have to import iron ores. If construction demand is waning in China, although it isn’t, the demand for more automotive might hold up the demand.

Auto companies are probably going to produce more than what they’ve sold last year. With the bench mark iron ore price set near the spot market prices, the price of local iron ore prices will be high enough to give the Chinese to buy iron ore from the outside; the Yuan appreciating and the seabourne shipping rates dropping, it becomes cost effective to import and self produce.

Given this theory, I think the iron producers in the US or in any other nation will do so well in the future. Also, if China wants to continue improving its infrasturcture such as roads and rail roads, it’s going to need more iron; iron is the building block of all infrastructure.

Perhaps, this is something that William Furman, a chairman for more than 20 years, in Schnitzer Steel Industries Inc. (SCHN) has seen in the future giving him enough conviction to invest his own money of more than $3.6 million. Even if it’s not SCHN, I’m sure the whole steel industry sector will benefit in the upcoming future.
[ Reference: 2010/2/5 Form 4, 2010/2/9 Form 4 ]

This is one indicator that hints that this may be a bounce and as such, there is a potentially fruitful upside ahead of us. Also, check out the weekly charts of the stocks that you are interested in to decide whether to go in. I have demonstrated this in my previous posting titled “Should you buy? When do you buy? What to look for?”.

Bounce bounce bounce!!

Money managers on popular business media such as CNBC have come out and expressed concerns of a bigger correction: The S&P, for example, has only come down 7% or so and we need at least 10% to define the down action as a correction. My take is that they may be true. But, the weekly charts of the majority of the stocks tell us otherwise. The majority of the stocks look the same probably because everything moves in tandem these days.

As an example, I’m going to use XME (SPDR Mining and Metals ETF) and, its member, STLD(Steel Dynamics) because I’m interested in metals these days and because I have a small seed position in STLD. We’re going to look at the weekly charts opposed to the daily charts.

XME has tested its 50EMA and it’s slowly making progress for now. Would this be a failed bounce? It could be, which means that there is some chance of a failure being wrong. So what do you do? You *test* it. Define your risk a little bit below the 50EMA, define how much you are willing to lose, and calculate the number of shares you want to start your position.

For example, it closed at 47.44 and its 50EMA is 45.08. I would define the risk at around 44.43 which is the low last week. You’re looking at a downside of 3.01(=47.44-44.43). You’re willing to lose $X. The initial number of shares you should invest in it is ($X/3.01) shares.

Now how would you define reward? I would define it near the top bollinger band at around 56.26 because everything moves along the averages and the more the price moves away from the averages the stronger the force to bring it to the averages. To be a little bit conservative, I would say 56 at which point you would have gained 8.56(=56-47.44).

Now you have a risk reward ratio of around 3(=8.56/3.01). 3 is not that great but in this tight market, it’s somewhat ok. That was pretty easy, wasn’t it? Once you have everything defined, you can be more “disciplined”: You can place your trade at night or in the morning and check it at the end of a work day. You can apply the same method in any other stocks, ETFs, bonds, etc.

Now let’s look at STLD. You can see a similar pattern: It’s testing its 50MA. Today, STLD ranked 13th among the 21 metals and minings stocks in XME. The 1st being CMP with a 10.25% gain.

Why STLD among many other metal stocks?

STLD recycles scrap metals. One important fact that people easily ignore and not openly discuss is the increasing cost of mining. The same applies to any type of mining. The easy minerals have been already excavated: We need to dig deeper to thoes areas where we never wanted to go due to complexity or high cost. When a company’s raw source depends on mining alone, the cost would have to increase over time. For a company to retain the earnings that it has enjoyed assuming the revenue is steady, the revenue would have to increase as fast as its cost. STLD has an advantage because it uses scrap metals although scrap metal prices fluctuate; however, the scrap prices are not completely fixed. ( I may be wrong because I’m still learning about this sector as much as I can with the available public information; however, its relative operating cost is way more cheaper than X(US Steels), for example.[not putting calculations here(this is getting long); just check out their balance sheets] )

The greatest potential in STLD is its acquisition of a privatly held major metal scrap provider Omnisource in 2007. Everything needs to be recycled as Earth itself is limited and as such I think STLD is well poised for the future and the near future when construction and manufacturing picks up or, in other words, the US economy truely picks up. One other imporant fact is that STLD is in the black after a year of losses. STLD seems like a good place to truely be in the long run.

Am I recommending STLD? Not really. I don’t have that much conviction on my analysis; I don’t do this for a living. These are simply my reasons for waiting for opportune moments to build my position. If you’re thinking of getting in, get your own reasons because they are important; charts only tell you what happened in the *past* and when the good entry points are based on *historical behaviour*.

PS. why define a risk when I’m long? Because most of the time, when the price breaks a certain price point or so-called support, it goes to the next meaningful support. Go check the history. =p I would rather buy at the next support then simply hold it on the way down to next support which could also be broken. Got it? Don’t know what I mean? Send me an email. Also, do *NOT IGNORE* the macro economic view (hmm… i want to write more about the macro regarding EU but I’ll leave that for next time.)

Since then, the stock has been on a downhill until today. Today’s move nullified the last three down days. When it was in a position that nullified the last two down days, I got in: I got a small position at 16.82 with my risk defined at 16.10. I’m testing the bounce.

There are a number of factors, that I think, make this a great opportunity.

• Customers are mobile device manufacturers; heard of the mobile device tsunami?
• Overseas customers (Japan, Taiwan, Korea); USD bounce off (checkout UUP)
• Lower than expected Q4 earnings baked in
• All the negativity about the future baked in for the last week or so; what can go wrong now?

I admit there are still risks such as the companies ability to meet or fulfill orders. It had a very bullish outlook in its Q3 earnings concall of which transcripts can be found here. Its inability to deliver results is definitely alarming but I think the negativity is already reflected. The price will prove my theory and on any higher lows, I’m adding more positions. Given the market’s expectation for a bounce off overall, this could go to 19.29 in a week or two.

Here’s its chart to help you understand what I’m talking about.

*note: The stock chart is by courtesy of stockcharts.com

The last three days’ sell off was exacerbated by Obama’s surprise announcement on bank policies, an attempt to restrict some of the profitable operations that banks carry on to fill their own tummies.

So why are we thinking about FAS, Direxion Daily Financial Bull 3x Shares, an ETF that moves by 3 times on the Russell 1000 Financials? Banks are crap, and everybody’s going to burn them.

Well yeah, that’s the current sentiment alright.

But in the short term, I say again in the SHORT TERM, we have two positive signs.

• Rumors that the Senate will confirm Bernanke’s 2nd term as FED chairman. (I think it’s true but it’s a rumor until it actually happens.) When this becomes “news”, we’ll have some certainty which we did not have last week.
• There was a huge spike in volume at the last minute of Friday’s trading day on all major financials such as JPM, C, MS, GD, etc. This goes the same for most of the stocks all across the market. It makes sense because FAS is an ETF of financials under the Russell 1000 Index. Even other ETFs, and indexes show such spike in volume at the last minute. Go take a look yourself.

So what am I considering doing? o_O

I think a really good play would be to trade FAS on Monday with a tight stop. On Friday, FAS closed at $70.29 and was pushed up to $70.35 in the after market. Depending on what happens over night, we might see FAS open way higher than $70.35. That alone – opening above the previous day’s close – already will bring in a lot of people back into the financials under Russell 1000 Financials exacerbating an upward momentum to where FAS opened on Friday, to $76.33. Even if it opens below Friday’s close, the price move above Friday’s close could have the same effect. It could go higher than Friday’s open; however, we have those people who got in at the recent highs waiting to break even and get out. Because of those people with so much remorse, we’ll going to hit a wall.

By the way, this is not the first time this type of trade happened. Check out what happened in 2009 early November.

I’m thinking of entering FAS above $70.29 and putting a stop at $70.29, which is my risk, the Friday’s close. I think once the $70.29 is broken after breaking above $70.29, it will continue to go down further.

Here’s a chart to help you understand what I’m talking about.

*note: The stock chart is by courtesy of stockcharts.com

*note: The stock chart is by courtesy of stockcharts.com

The strategy here is to hold as long as the uptrend continues. It’s only recently the trend reversed to an uptrend from a downtrend. We’ll have to see whether the uptrend continues in the long run.

For now, I’ve set two chandelier stops based on the recent high of 4.95 and its ATR(average true range) of 0.33.
i) partial stop at 4.29 = 4.95 – 0.33 x 2
ii) full stop at 3.96 = 4.95 – 0.33 x 3