Now USD is ready to make a come back with a bang. It’s time to load up once again and enjoy USDA prime beef after cashing out after trading the USD recovery story.

Taking a glimpse at the USD vs JPY chart. We’re seeing strong momentum in the 5 min chart. In the daily chart, all we need to do is break above the 80.80 short term resistance. Once we break above we go hallelujah. What happens when the USD gets strong against the JPY? Nikkei does well. And how can we benefit the most from the Nikkei bullishness? Buy EZJ. It’s that simple: Easy J.

At the beginning of the year, we’ve passed a point in the oil price that people think would deter demand.

Look at this graph. The cyan is the SP-500 and the colored is XOIL.

If this pattern holds for a while, we would see the market open up when the oil trades down and is held down when the market is open and vice versa.

While watching Light Sweet Crude Oil Futures for April delivery trade down, I’ve also seen an uptick in the Emini SP-500 or SP futures.

I’m guessing that if we reach $98 on the April contracts, we might see some downside to oil. As of right now, it’s trading at $99.58.

While going through myriads of charts of companies that I regularly monitor, I found International Paper (NYSE:IP).

Here’s the chart.

The prices have been tested at least twice – depending on how you interpret it, it could have been 3 times – at the 27 level. Once we see bids going higher above the 50 MA at around the 28 level and if prices stay there, that’s the time to get in.

I tend to jump in early, so I would build my initial position on the intial break out and put a tight stop at around 27.90. There’s a tendency to be some selling pressure at the 29 level as historical prices have shown. I would accumulate at the 28 level after bouncing below the 29. If we do not sell off at the 29 level and break through, I would accumulate once again.

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On the other hand, if the 27 level support is broken. I would enter a small short position and follow through with the expectation drawn as orange arrows.

*note: Currently, I hold FFIV (entered today) and TLT.

Everything stems from the concern in the middle east. Currently, the protests are happening in Libya, Morocco, Bahrain, Tunisia, and Yeman for different reasons. Just search for them on Google; there are myriads of information on what’s going on.

The progressing political instability in the Middle East is affecting the commodities market. In fear of possible cut of oil supply, we’re seeing oil prices rise. I’m reading a lot of articles from some prominent economists that when the WTI Crude Oil Futures reach $100, we’re going to see consumer demand go down due to the cost push initiated with high oil prices. It makes sense but I’m not sure whether $100 is the tipping point. To me, $100 seems like a psychological value. But if the market *believes* so, then I must do the same. I’m just a single player after all.

While going through some charts, I’ve found some nice setups in SPLS and ORLY. The setup I’m talking about today has two basic criteria: One is the price being near a major average, and the other is the oversold signal. I would monitor the two for now. I would only try when I see some buyers coming in and buying at higher bids.

The stochastic K(12,3) has consistently signaled good buying points; we have a high probability trade with a 75% chance. Also, the price is nearing the 200 SMA of the high 20 level. Today’s price movement is a concern because the push for higher prices were not sustained; however, the strong upward price movement may sustain itself near the 200SMA. If I see buyers at that level, I’m going to give it a shot.

In addition to the daily chart, the price is still above the 40 SMA which is the so-called mutual fund average in the weekly chart.

ORLY showed great price movement today. It touched the 200SMA and the price remained elevated although it bounced back after touching the recent resistance of higher 55 level. If the price can move above 56, I would be a buyer with a close stop near the high 55 level.

We can only *try*.

Here are some good setups for the longs. I’m going to keep this brief; but you get the idea here.

MGM

TSO

UNIS

WPRT

We’re looking at T2108, a percetage graph representing the percentage of stocks above their 40 day simple moving average. Don’t take my word for it but I learned from somewhere that 40 day simple moving average is the de facto average for mutual funds.

T2108 is only available at Worden.

Historically, the T2108 has shown some interesting patterns against the major averages such as the S&P 500. Here it is.

*note: green is T2108 and cyan is SP-500.

As you can see, as the T2108 touched the 80% line which is the white horizontal line that connects the apexes of the green graph, the SP500 readily fell down precipitously.

Where are we now? We’re almost there. There is some room for the green line, the T2108, to get dangerously close to the 80% line. It looks like we have 2 or 3 days after which, coincidently, we’ll start getting job report figures: We’ll get the ADP report, initial job claims, and the employment report on Wednesday, Thursday, and Friday, respectively.

I’m not predicting the market would fall like it has in the previous instances. I’m only anticipating such a move.

So what do we do?

If you are a long term investor, you might want to buy a 5th of what you expect to invest because it’s still possible that this market keeps going up. If you are a medium term trader like me, I would nibble a little here and there and put a tight stop. For example, I would not extend my risk above 0.5%; if I’m wrong, I lose less than 0.5%. If you’re a day trader, this is the time to make a lot of money.

I’m in F, AXP, GILD, GS, and WPRT with tight stops at the moment. When all the equities fall, we gonna get down it.

I realized that the groceries sector, MG734 which is a custom index from worden, is forming a support line which used to be a resistance line.

So what does that mean? That means it’s time to rotate money into the grocery sector.

So I looked at KR, my favorite trading vehecle in the groceries sector. What a huge drop it had on the 1st of December!!

It looks like its forecasted growth rate is not as good as expected. But we all know that the selling is overdone. Arbitrage opportunity!!!

There’s a clear support line at the 20.50ish level. So that’s going to be my stop. If I’m wrong, I get out with a loss at 20.50.

There are three scenarios that I expect to happen.

Expectation #1: Failure at the 200 SMA.
Expectation #2: Failure at the 50 SMA or 20 SMA which ever is lower.
Expectation #2: Slight consolidation after filling the “GAP”.

There’s some relatively significant number of open contracts open for the 22.50 Jan calls. It means that people are expecting expection #2. The market most of the time is about self-fulfilling prophecy. If you have enough people thinking in the same way, you’ll get it.

With the overall market looking toppy, I would bet a little on KR while putting some shorts by buying SDS.

Ok. Here’s the deal.

MDT: Medtronics

I’m anticipating a volatility squeeze on MDT’s price action. Some technicals are aligning very well.

1) The stochastics are in an uptrend while the price action remains stable or flat.
2) On the weekly chart, the MACD histogram is on a positive slope while the price action is showing a negative slope. This is called the bullish negative divergence showing lower lows in the price and higher lows in the MACD.

Also, the chart looks like a bullish cup-handle pattern. Am I simply biased to the bullish side? No, I’m not: I’ve reversed the charts and it looked to me like the chart was heading down.

MDT Daily Chart

MDT Weekly Chart

Before commiting to a bullish buy side plan, I asked the performance question on the sector MDT is in: How well is the medical devices sector doing in general?

So I looked at IHI, iShares US Medical Devices ETF. On the long term horizon using the weekly chart, the prices are now back to the 20 SMA which is historically significant. What do I mean by significant? If you look at the chart, the 20 SMA has been acting as both support and resistance. Now the 20 SMA is becoming support from being resistance.

We can observe some bullish technicals on the long term chart on IHI.
1) We can observe share accumulation through the Accumulation/Distribution graph
2) MACD historgram is on a uptrend and has crossed over the centerline to the positive side.
3) 13 EMA is now on a slightly positive slope telling us that it’s time for accumulation on every over-sold signals.

Oh hell, IHI looks like a good buy as well for a month long trade.

IHI Weekly Chart

But let’s look at the daily chart of the IHI before deciding on whether to hop on the IHI train.

The daily chart of the IHI tells us that the IHI is over-bought. So this increases the risk of my trade on IHI as well as the MDT: If I wait a bit longer, I could probably get in at a better price. Is the over-bought signal going to prevent me from going in? No, it’s not. Historically, the over-bought signal persists on bull markets. If we do not go in at all because of over-bought signals during bull markets, we would have never made any money. However, the risk profile goes up and as such, we trade accordingly: Put a portion of the planned amount and accumulate on any type of over-sold conditions.

IHI Daily Chart

Now you wonder, how are others in the IHI look like. The next top holding positions in IHI is COV, Covidien Ltd. COV chart looks the same. I see the bullish cup-handle pattern and the weekly chart moving above the 13EMA which is a historically significant average.

COV Daily Chart

How about TMO, the third largest? TMO chart looks the same. But I have to admit that TMO looks like a short-term short.

TMO Daily Chart

So you would ask at this point, why MDT when others in the same sector looks the same? The answer is simple on this one: Price to earnings ratio. TMO has a PE of 16 and TMO 20. MDT has a PE of 10! I see relative outperformance in MDT among others in the same sector.

Now the decision to trade the MDT has been decided. What do we do now? I’m excited, you’re excited, and we’re excited because we’re going to make gazillions so we should go all in, right? No. You should start thinking, what if I’m *wrong*. What would be the cost of being wrong? What is the cost or penalty that I can handle if I’m wrong?

The next thing you need to do is to determine your risk tolerance. For example, let’s say it’s $1,000 meaning I’m ok with losing $1,000.

The Friday’s close was at 33.45. In the last two weeks, the lowest low was at 33.05. I would put a stop at 32.90; so my risk here is $0.55(=33.45-32.90) a share, a little less than a 2% loss. Since my loss tolerance is $1,000, I would buy 1,818 (=1,000/0.55) shares. The 1,818 MDT shares translates to $60,903. So that’s how much I would buy if my loss tolerance is $1,000. I would prefer 1,800 shares just in case I want to sell 18 call contracts to the upside later on.

Now, we can think about reward. We should ask the question whether making this trade is sensible. What’s the risk-reward ratio? If the volatility squeeze happens to the upside and I’m right, I see this going to the 200 SMA at around $39 which is a little less than 20% upside in the long term. So the risk reward ratio is around 1:8 which is not a bad trade. In the short term, there is resistance at around 35.50 at which point people who got in recently at that price would try to break even providing selling pressure. You can sell all or a portion at that level if the price doesn’t break above the resistance. I prefer selling a portion to realize some gains and have the remainder capture the likely upside as long as the weekly uptrend is intact.

The story doesn’t end here. Because you need to manager your positions if the price moves higher and higher; however, that’s another story. As a lot of people would say, it really depends on how it looks like at that moment in time; you have new information, you change your strategy.

[Update on 2010-10-20 Wednesday]
We just had what has been expected. We have a volatility squeeze to the upside. I see it highly likely to continue its price movement to the upside to the $39 area. At the moment, once we reach the $39 area, we’ll see consolidation before making a move above $39 or see rejection to the downside. I don’t know what’s going to happen exactly; I just know the likelihood.

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.