A Nice Looking Old Fashioned Trades

A lot of traders have left equities because of the low volume and difficult volatility. For example, take a look at the QQQQ

Even at the best entry on this chart in a long position, you'd have spent a month in the Q's and made 5%, but when we look at charts we are not in the moment. Part of understanding the market through a chart is to understand the emotions that go along with the chart. Take for example the first down day out of the ascending wedge and the following days? Would you have held that long? Or take Friday's extreme drop of 2.54%, could you say you would have held there? For most after nearly a month and a 5% profit, you can see how it would be difficult to hold onto that long position, even in a market that is trending up. Same for the shorts, Friday may have been very encouraging and Monday you may have written off , but how would you feel holding through today? Being able to look at a chart and put yourself in the emotional state the chart depicts is a very helpful ability and gives you insight into the market, but the point is, long or short, this has been a difficult market to trade or hold trades for more then a few days in many instances. Part of that is lack of volume and the volatility that causes, another part of the equation is the fact that the market s at least 40% above the median S&P P/E and on a fundamental basis (think about the economy, the foreclosures, the people you know who have been effected, how you have been effected) it doesn't really make sense the market is as high as it is ad it makes less sense that it has not put in even a normal bull market rally correction. This has to do with the conflict between reality/fundamentals and the manipulation by the Federal Reserve to keep the market elevated as long as they can to create their "Wealth effect" that they speak of in the December 14th Fed minutes. They either believe or want you to believe that because the market is higher, the economy is better and people will go out and spend based on that. I can't believe they believe this, but they say it.


We saw on Friday, accumulation as it was happening in the afternoon, enough for a bounce and that's what we have seen the last to days. However, the fundamentals are rearing up and demanding to be addressed. Even as the ISM number came in today higher then consensus, read behind the headline and you'll see that input costs throughout all types of manufacturing are rising rapidly. Margins are being squeezed. Earnings forecasts will be revised lower and the market seems to be at a crossroads caught between the Fed's levitation act and reality. 


The effects of our own Fed's main export, inflation are being felt across the globe combined with rising commodity prices. A government has fallen because of it, another is in turmoil and many are on the brink. One of the richest nations in the world per capita, Kuwait, is giving away free food and $3500 to go along with it.  Even here at home, just today, we find out that food stamp usage has just hit a new record high, 43.6 million Americans or 15% of the population require nutritional assistance.-a NEW ALL-TIME RECORD! And the Fed answers Americans biggest investment problem, the value of their homes entering a double dip recession- off more then 30% officially (from what I've seen personally, it has been consistently 50%) with a brief retort in the FOMC December 14th minutes that the wealth effect of the stock market offsets those losses. SERIOUSLY, IS BERNANKE SMOKING CRACK! 


Europe may not be on the front pages today, but it will be back on the front pages soon as the fear cycle makes it's way back to Europe. China is overheating with inflation and I'm willing to bet the PBoC raises rates again before the month is out. Something has to give. Investors are walking away, giving up. They see through the charade and make no mistake, a lot of this is about throwing the banks some income so they don't have to be rescued, but there's no end game. Congress keeps on spending. The Treasury keeps issuing debt and the Fed pays billions of dollars to primary dealers like Goldman Sachs to buy that very same debt only weeks after it was issued. When will someone demand to know where the value of those billions of dollars is? How did Goldman earn all that money for passing a bond in a few weeks?


Another report today looked at the PMI Prices Paid (inflation) data and came to the following  conclusion, 
" A simple regression analysis of Prices Paid to CPI data indicates that the median CPI 12 months following a PP greater than 80 (such as this morning's 81.2)is over 6%!"


So if you think this sad state of the market will go on forever, think again. The reality of bots on the ground vs. the Scholarly thought at the Fed is starting to clash. If the above statement is even remotely close to reality, then the Fed will need to raise interest rates well before the get to another round of Q.E.


In any case, that will sort itself out and we'll be monitoring events before they unfold. In the meantime, lets look at a couple of trades that look old fashioned and NOT OVERLY MANIPULATED, I suspect because they are bod related and there's still some volume in trading there.


First, TLT short.

TLTTLT breaks $90.40 you enter a short order on it. You can use the 40 day moving average at approximately $92 right now as a trailing stop and judging by the action, this should continue to work out as a nice trending trade. I noted in white squares the high volume on an extended leg down, as it often is a short term reversal signal as you see here. The other large volume spike doesn't fall into the same category as it was just starting a leg down.


If you are looking to play this, but want a little more volatility, we've already made some good money in TMV and it's looking like a worthy set-up to try as well.

TMV is a leveraged 3x inverse of the 30 year bond. It's entered a triangle consolidation/continuation-type pattern as well and looks close to a break out. It responds well to a 50 day moving average and that can be used as a trailing stop. This one you can also consider a limit trade and you can go long here on a breakout of $48.25. 


These are trades that look ready, they have nice set ups and defined risk. Simply apply some risk management at 1 or 2% of portfolio or whatever your comfortable with and the entry is right there. It needs to show you first, but there's still the potential for plenty of movement. These have been trending well so why not consider them?