Issue 270
Posted: September 8th, 2009 | Author: WMS
Market Strategies
Covering Investing Success Strategies For
Stocks – Bonds – Interest Rates – Natural Resources – Currencies – Venture Capital – Gold
A Publication of Princeton Research, Inc. (www.PrincetonResearch.com)
Contributing Staff: Michael King and Dr. Jan Vandersande
September 8, 2009 Market Strategies Guide To Successful Trading
INDEX OPTION RECOMMENDATIONS
We are now in our intermediate cycle time frame of late August/early September in which we expect a market high. The high could have come in on August 28 or will come in this week. At the moment we only recommend put options on the DOW when it trades below last week’s low of 9,253. We recommend the October 95 put (DAVVQ). If that does not happen this week then we will buy put options next week.
For investors it has continually been recommended that some puts are held to protect one’s portfolio (portfolio insurance) against sharp market sell-offs. New and/or additional positions can be bought on the expected rally into late August/early September. For those who have no put options to protect your portfolio we recommended the following options, especially on any rally: the DOW October 94 puts (davvp) or the October 98 puts (davvt) and the QQQQ October 41 puts (qavvo) or October 44 puts (qavvr).
For those of you who do not buy puts to protect your portfolio, there is an ETF that is the inverse of the DOW. The symbol is DOG and goes up when the DOW goes down and down when the DOW goes up.
Stock Option Recommendations
New Recommendations
XLF- Financial Sector ETF- 14.22- appears to be forming a head and shoulder top formation so puts are timely. Buy the October 15 Put- XJZVO- 1.25- for a move to 13 and then possibly lower. Place a stop loss on the option when the ETF closes above 15.50. Take half profits when the ETF is at 13.
KBH- KB Home- 17.70- appears to have formed a double top formation and now has rallied back to resistance at 18 so puts are timely. Buy the October 19 Put- KBHVS- 2.20- for a move back to 16 and then possibly lower. Place a stop loss on the option when the stock closes over 19. Take half profits when the stock is at 16.
AAPL- Apple- 170.31- this is a short term bullish play for a small move. Buy the September 170 Call- APVIN- 4.10- for a move to 173 and then higher. Place a stop loss on the option when the stock closes below 167. Take half profits when the stock is at 173.
Option Comments
We were stopped out of our remaining half GAGUH put option when our stop was hit. The trade ended up break even. Some of our put options came very close to initial targets during last week’s sell off (levels at which to take half profits) but just did not get there.
Previous Week’s Recommendations
- All options count for 5% each for model portfolio calculations.
- When the option has doubled sell half the position.
- Stop Loss protection is offered with each trade.
- The cost of the option is the asking price (or the price between the bid and ask, whichever is more realistic) at the close the previous Friday or at the open on Monday.
- The options will be followed until closed out.
Note: Previous closed out option positions can be found in the June 29, April 20, February 23, 2009, January 19, 2009, September 15, 2008 and November 24, 2008 newsletters.
New Stock Recommendations
DZZ- Double Short Gold ETF- 18.48- goes up when gold goes down and vice versa. Gold is very over bought so should pullback. Buy the DZZ for a quick trade. Take half profits when the ETF is at 19.50. Place a stop loss at 17.50.
Model STOCK PORTFOLIO
- Each stock is allocated a 5% share of the portfolio (unless otherwise indicated).
- We recommend a 10% position in ENZ and MTBR.
Note: Previous closed out positions can be found in the March 23, 2009 letter.
Model Portfolio Comments/Changes
We will close out some of our portfolio stocks at the open on Tuesday. We will take the remaining half profits in FXI and AMED. We will take half profits in TPI. We will hold the remaining positions since they are special situations and we believe they will not go down much during the expected correction.
Technical Information
We have been looking for a market top in our intermediate cycle due now in late August/early September and at the moment it looks like the high came in on Friday August 28. In last week’s letter we wrote that the advance/decline oscillator gave a sell signal on Friday August 28 not withstanding the fact that all three indices made new intraday yearly highs. That sell signal showed how weak the internals of the market were (as an example: the Nasdaq was up on that Friday but had over 600 net declines that day). That sell signal was a great signal with the market dropping sharply the first three days of last week. By last Wednesday the short term oscillator was very oversold and put option buying had picked up sharply (but not at extreme levels yet) so the rally on Thursday and Friday was not unexpected at all. It is still possible that the market rallies this week (the tail end of our cycle) but getting above the August 28 highs at DOW: 9,360, S&P 500: 1040 and QQQQ: 41.08 appears unlikely, although it is possible. The rally could extend until the end of the week. The very over sold condition has been mostly worked off but call option buying picked up only slightly on Friday. Initial support is at the September 2/3 intraday lows at DOW: 9,253, S&P 500: 992 and QQQQ: 39.02. The support below those levels is at the August 17 lows at DOW: 9,116, S&P 500: 978 and QQQQ: 38.44. Breaking the September 2/3 lows would be the first indication that a larger pullback was in progress and breaking the August 17 lows would likely indicate that the cycle top is in. The upside has to be given the benefit of the doubt as long as the September 2/3 lows hold. Any larger pullback is expected to eventually test and possibly break the intraday lows made on Wednesday July 8 at: DOW: 8,087, S&P 500: 869 and QQQQ: 34.30. The parameters to watch are thus very clear and let the support and resistance levels govern your trading and your stops.
We are in a secular bear market that appears to be far from over and we expect lower prices later this year or next year. However, every bear market has several good rallies that can last from a few weeks to many months and are definitely worth playing. We are in one of those rallies (which could even be called a cyclical bull market in a secular bear market) now.
The support and resistance levels to watch now are: S&P 500: support is at 978, then 966-968, then 927-932 and then 869 while resistance is at 1040 for the QQQQ: support is at 38.44, then 36.84-37.23, then 34.30 and then 32.95 while there is resistance at 41.08, then 42.00 and then 44.00 and for the DOW: support is at 9,116, then 9,000, then 8,580-8,610, then 8,087 and then 7,939 while there is resistance at 9,630 and then 9,800.
CYCLES
We had an intermediate-term cycle due in late February/early March (plus or minus a week) and the low came in on March 6/9. The next important cycle was due in late April/early May (plus or minus a week) and a low came in on May 6/8. The cycle following that one was a short term cycle in mid/late May and a triple bottom low came in between May 15 and 26. The next short term cycle was due in mid-June (plus or minus a few days) and a low came in on June 23/24. An intermediate cycle was due in early/mid July and the low came in on July 8. Next there was a short term cycle due in late July and a high came in on August 7. The cycle after the late July cycle is an intermediate cycle due now in late August/early September, which we expect to be a high that likely came in on August 28 (or could come in this week). The cycle following this cycle is a cycle in mid October which at the moment looks like it will be an initial low. The cycle after that one is in mid November and could be the final low of the correction.
Market Laboratory – Weekly Changes
FUNDAMENTAL NEWS
The past week, while negative, it could have been much worse as stocks rallied after the unemployment report even though the unemployment rate jumped to 9.7% the highest since June 1983. The workweek remained flat near record lows. Payrolls were better ( -216K vs -230K ), however after the upward revisions to June and July they more than offset besting the consensus for August. The volume was light as disappointed short-sellers, covered, then left for the three-day holiday. The markets trended higher and gained over 1%.
All ten industry groups were lower: Financials were the worst performer on the week off 3.4%. The biggest declines were last Tuesday after rumors abounded that Wells Fargo ( WFC:$ 26.91 ) was planning a secondary, which proved to be false and both the stock and other financials rebounded substantially. WFC ended off just $ 0.39 or 1.4% as they announced they could pay back the TARP funds without raising equity. The other nine industry groups were all lower: Utilities were off 2.14%; Telecomm 2.03%; Oil and Gas down 1.97%; Technology – 0.58%; Industrials minus 0.48%; Consumer services – 0.47%; Health Care – 0.36%; Basic Materials – 0.21%; Consumer Goods -0.21%.
ECONOMIC NEWS
Last Tuesday the ISM report showed a better-than-expected reading of 52.9 in August besting the consensus of just 50.5. Pending Home sales were also very favorable rising 3.2% in July and for a sixth consecutive month. The consensus had called for just a 1.5% improvement. Despite all this good news a quick sell-off followed a brief rally. Then on Wednesday, the ADP report was neutral and the Initial Claims on Thursday was neutral .
Friday’s Employment report was not much different from expectations showing 9.7% unemployment vs 9.5% expected, and payrolls of -216K vs -230K consensus. The Average Workweek was in line with forecasts and the previous week at 33.1 hours. Hourly wages rose 0.3%, almost triple expectations and up from + 0.2% in July. However, another measure of unemployment, U-6, is much more grim, which includes part-timers who want work but can’t find a full time slot in addition to workers not on the rolls because they are discouraged. In August that rate hit an all-time peak of 16.8% or an astonishing 26.274 million people out of work. ( Published by Barrons )
Looking ahead the new week commencing Tuesday is very light on economic reports.
THIS WEEKS ECONOMIC NUMBERS AND MEDIA DATA
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CONTACT
Please Direct All Inquires To:
Mike King
Princeton Research
3887 Pacific Street, Las Vegas, Nevada 89121
Phone: (702) 650-3000
Fax: (702) 697-8944