Commodities

I have to admit that I've been very interested in commodity trading lately. So much so that I set up a simulated trading account with Lind Walcot a few weeks ago to get a feel for it. The thing about commodity trading is the massive leverage involved. One typically only has to put up a fraction of the money it costs to control a contract for the commodity of interest. Such trades offer huge fortunes in a very short time, but also offer huge losses. In my simulated trade account I bought 50 Copper contracts. In a matter of 1 week my account went from $50,000 to over $280,000! I obviously don't have a trading stake that would allow me to take those kinds of risks, but it was a real eye opener. It isn't hard to imagine the trading going the other way and being $260,000 in the hole. That is scary! (Commodity trading is how Jesse Livermore lost all of his money. )


So in order to appease my commodity bug (gold has been doing very well for me lately), I purchased the DBA etf 3 days after the report stating that record amounts of corn have been planted. DBA is the a Powershares ETF that tracks the price of corn, wheat, soy beans and sugar. I'm not buying the DBA because I think corn is going up, but because I think that wheat and soy beans are going to skyrocket, mostly because of the record corn planted. If one adds any weather related issues, like drought or severe cold, all of the soft commodities will rise. That is my plan.

Housing Market--Crisis and Complexity

I'm reading "My Life as a Quant", by Emanuel Derman. It is an autobiography of a relatively successful physicist who joined Goldman Sachs and became a relatively successful quantitative analyst. Emanuel worked with Fischer Black to modify the famous Black-Scholes options pricing model to work for treasury bond options.

In the book, Emanuel is hired away from Goldman to work at Salomon Bros. to help model adjustable rate mortgage investments. While reading today (Derman was explaining the complexity of mortgages), the current uncertainty in the housing market hit me like a ton of bricks. I never understood what a house of cards the market really was. Here is an excerpt.

"Banks who lend to homeowners own the mortgage, the claim the the homeowner's future monthly repayments. Periodically, the banks turn around and sell the mortgages they have acquired to GNMA, FNMA, and FHLMC, government agencies that act as financial intermediaries by pooling together vast quantities of similar but not identical mortgages into more standardized securities. They then resell these pools to large investors--mutual funds, pension funds, insurance companies, hedge funds, and the like--in search of interest-bearing investments. This process of asset acquisition, pooling, standardization, and subsequent sale provides a liquidity that frees the savings bank to make more loans. As a result, the percentage of residents who own their own homes is greater in the US than anywhere else in the world.

Mortgages are messy, though it takes only a little careful high-school math to work out the monthly mortgage payment that will draw the loan down to zero over 15 years. But that's just the start. Everything about an adjustable rate mortgage pool--the interest payments, the principle repayments, and so on--varies with the future level of interest rates, so an adjustable rate mortgage (ARM) is really a complex option whose payments are contingent on interest rates."

I never appreciated how interconnected the housing market was. When all of these lender companies start going under the losses are really going to mount. The first dominoes have already started to fall. Who's next?

Finally...a winner

I mentioned that I've been having a hard time with this choppy market and that the only thing that has been doing well for me are the gold stocks.

I own a small stake in ANO, which has been gang-busters recently. But other than that, my other gold stocks have been hovering around their lows. That changed today when US Gold Corp (UXG) announced a favorable exploration result. The stock is up 23% right now. I also own Great Basin (GBN), which is up a nice 5% today. I was getting worried because it seemed like most of the gold stocks had already taken off.

Now if Tanzanian Royalty Expl. (TRE) can wake up, I'll really be happy.

On another note, I'm still waiting for the pullback in MTLK so I can buy. No luck so far.

Microvision Inc. (MVIS)

You may have noticed that I've changed the chart style of my posts. This is because I've recently started using Telechart 2007. While the charts on Stockcharts.com are more aesthetically pleasing, the screening power and speed of Telechart are amazing. Today I'm presenting a chart that I recently came across during one of my screens.

Today's chart is less about technical analysis and more about the fundamentals. Microvision Inc. (MVIS) is a company that I have recently come across using the screening power of Telechart 2007. Here are the daily and monthly charts. It looks like the downtrend has been broken, but MVIS isn't about the charts, its about the fundies.

What does MVIS do? They are basically a micro-electrical mechanical system (MEMS) device maker. Ok, what is that? MEMS are silicon based integrated circuits that also have micro-scale mechanical devices on them, sometimes referred to as systems-on-a-chip. The mechanical devices expand the possible capabilities and uses of these chips.

MVIS use these MEMS devices to make extremely small color projectors, so small in fact that they can fit on pda's or cell phones. Take a look at this picture.

This technology was demonstrated recently at the Consumer Electronics Show in Vegas and it created quite a buzz. I don't know about you, but I would love to have a full color projector on my cell phone. MVIS has other applications, like having color heads-up-displays for car windshields and personal projection devices for soldiers, but the cell phone projector could be huge.

This is a very risky bet though. MVIS doesn't make money and is quickly running out of cash. They just announced a deal with an undisclosed car company, but if they don't start making money soon, they will be gonzo.

Interestingly, MVIS does some collaboration work with Lumera (LMRA), a company that was recently brought to my attention.

Here is a little bit of hope

I'm beginning to despair about my Chinese stock market trade. I know the bubble will burst eventually, but did I get in too early?

Here is a nice plot of the Nasdaq bubble and the current Chinese market that gives me some hope. This can be found on "The Big Picture".

Very busy

I haven't been posting because I've been very busy lately. Just a quick update.

I was stopped out of my QID trade. My FXI trade is looking like crap. The only thing working for me are my gold holdings.

I have a small stake in Anooraq Resources Corp (ANO), which I got in at around 1.23.

The market is punishing me big-time right now and I think it is time to take a break. I do have some interesting speculative companies that I'm researching right now that look pretty good. I'll write about them this weekend.

The market is nervous and so am I

Bearish? Why yes I am.

Building short list

When one is looking for short candidates it is important to jump onto the laggards and to never short the leaders. Just like when a bull market is in full force, one should always buy the leaders.

In this current correction it is no secret that the financials have been the weakest. They led on the way down and have not fully recovered with the rest of the market on this current counter-trend bounce. Just check out the financial ETF (XLF) chart. It is looking very ugly at the moment, with the relative strength vs. the S&P 500 trending lower.
Ok, so we've identified the weakest sector, what about the best short candidate within that sector? Take a look at the choppy and volatile action of Icici Bank (IBN). Not only is this guy living below its 50 dma, it also has a horrible Accum/Dist rating of D in IBD's stock checkup. Another nice thing about IBN is that it has come a long way up, giving it plenty of room on the way down. Another reason to short Icici Bank is that it is an Indian bank and we all know that the emerging markets tend to go down a lot more than the US during corrections.

The only problem now is to find an entry point.

Before considering if we should wait for a bounce back to the 50 dma, consider the possible downside of IBN. Below is the weekly chart, which shows the dangerous broadening top pattern. These patterns often result in huge drops, so it might be prudent to just short it now instead of waiting for a bounce. We could also wait for it to hit support around 31, bounce and then short, because this guy is headed to the 26 level.

My plan is to wait for a small bounce, and buy some put contracts. The premiums will drop a bit if IBN can get back up to 38.

Short the market, Buy Hittite Microwave (HITT), and Short the airlines (LFL)

I got into the QID pretty heavy at the open today (Remember a long QID is short the Nasdaq 100). The Nasdaq went down nicely after that, recovering later on in the day. I'm looking for the Nas to get down to 2200. I hope my stomach can get through tomorrow because it should get interesting.

On the long end, I finally spotted an entry point in Hittite Microwave (HITT). It tested the lows on lighter volume and should head higher soon.

I'm tempted to short some of the airlines. They are extended and fuel costs are going through the roof. Lan Chile (LFL) would have been a perfect short during the second peak of the double-top but I missed it. I will look to short this guy when it sinks below the 50 day moving average.

This chart looks a lot like the CorVel Corp (CRVL) chart of a few weeks back.

Second leg coming?

The markets are choppy and seem very worried.

I'll probably get back into the QID on a bounce.

Next stop for the Nasdaq is 2200!!!

Becky's Birthday

I'm off to Chapel Hill to celebrate Becky's birthday and watch the Tar Heels.

GO HEELS!!!

The Great Humiliator Strikes Again

Ken Fisher likes to refer to the market as "The Great Humiliator" and it sure lived up to the name today. The shorts were absolutely destroyed today.

Once again, Tom O'Brien makes the right call. I could have sworn that he was wrong this time but at least I was smart enough to not short this market after the whipsaw of March 14th.

With the Fed leaning against rate hikes it looks like gold is going to explode. They would rather see inflation than slower growth, that much is obvious. Since I have some sizable student loans, inflation is just what the doctor ordered.

Oh yeah, we got our follow-through day today.

Metalink Ltd. (MTLK): My portfolio's messiah?

As SIMO continues to rocket higher, mocking me along the way, I'm left with finding another winner that I can stick with, through thick and thin (not too thin of course).

A similar situation took place last summer when Sigma Designs (SIGM) broke out and never looked back. I waited and waited for a pullback but it just never came. It was easier to get over this one because I never actually owned it.

What attracted me to SIGM was its position in IPTV (Internet Protocol TV). It makes chip sets that bring content over the internet to the home. Eventually everyone will have a IPTV box on their HDTV that will bring video on demand, internet, and communications to every room in the home. Very exciting, especially since the fiber optic infrastructure is already in place for the explosion in bandwidth that will be required for the technology to work.

I keep up with SIGM and found this article today about a small Israeli company and a huge deal it just announced with Samsung and STMicroelectronics. Metalink Ltd makes similar chips but better and at a lower cost.

Metalink joins the big league

I suggest you check it out. Also, look at the company's website.

Here are my charts for the company. I don't think it will rocket up like SIGM did, mainly because of the large overhead resistance that exists (check out the date of the IPO). I think there is some serious upside to MTLK and should be added on dips.

Technical Analysis Books

For the most part, the technical analysis books that I've read have been pretty lame. They usually just tell you what to do when a certain pattern appears or explain what to do if a certain indicator gives a buy or sell signal. A good example of this is the recent TA book of Gerald Appel, the inventor of the MACD (an indicator that I don't use). I would not waste one's money on this book. I found it completely useless.

I just finished a TA book that is a definite exception to the rule. "Technical Analysis: Plain and Simple, 2nd Edition", written by Michael Kahn not only gives a comprehensive overview of most of the important chart patterns and indicators, but also tells you how and why they work. Kahn has a degree in physics and his scientific training definitely comes through in this book. Kahn also covers many aspects of risk/reward and money management, skills that most novice investors lack.

If you are looking for an introduction to TA, I would highly recommend this book.

Almost Family (AFAM) makes the IBD 100

I'm still depressed about some of my trades these last few weeks. I was stopped out of Silicon Motion (SIMO) on the big drop of Feb 27th and that stock has never looked back. I definitely feel that missing out on big gains is much more painful than taking a big loss. The thing that really sucked is that there was so much panic that day that I couldn't cancel the stop order when the markets opened. When the order finally went through, it was $1 below the stop point.

To add insult to injury, Almost Family (AFAM) made the IBD 100 list this week. I was following this stock back in September 2006 and missed the buy point. It has since doubled. Again, very, very painful.

I hope I'm learning from this.

Tournament time

I'm putting a hold on my trades. This market is just too dangerous for me right now. Time to be patient and watch some college basketball.

I'm in uncharted waters.

Go Heels!

Ouch!

I got whipsawed today when I went short after the market bounced off the lows and headed back to even.

Want to see the correct play for today's action? Check out this post by Brent Steenbarger. It couldn't have been posted at a better time.

How did it go today?

My strategy of picking up some stocks that were already at local bottoms seems to have protected me a little. I don't like the way gold is trading and will exit more of my long positions tomorrow.

I did pick up some Gateway (GTW) at the lows. This should be interesting to watch.

Strange trade with Gateway (GTW)

Check out this bottom feeding target. Gateway Inc. is a washed-up old computer sales company that I didn't even know existed anymore. I came across it in a technical screen and it actually has a nice setup.

First, the weekly broke a solid downtrend.


Second, the daily just broke out of a symmetric triangle pattern. I think I'll give it a shot.

Some quick gold trades

Here are some of the gold stocks that I've picked up recently. I hope these guys can make up for the fact that I missed the MEMC Electronics (WFR) buy. Also, did you see Lumera (LMRA) today? It is back in the range and could be a buy when it tests the 200 day moving average again.

UPDATE: I didn't even notice that HMY was downgraded to neutral from overweight by JP Morgan today. The stock actually traded up most of the day. I love it when that happens. Very bullish sign. The same thing happened when I bought AllianceBernstein back at $70.

Lumera (LMRA)

CANSLIM investors should not be buying stocks until we have a follow-through day. In the meantime, I'm looking at some other stocks to trade. I've mentioned that I've been picking at some gold mining stocks, but I also want look at some other possibilities.

Lets take a look at Lumera Corp. (LMRA). This is a stock that was brought to my attention by Ariel, a reader living in Spain. I've had some trouble getting any meaningful information about the companies products. Interestingly, I saw a talk at Northwestern today given by a guy who works in the field that Lumera is making products for. I don't have time to get into it but the guy is a professor at Caltech (Jim Heath) who was the primary grad student researcher who helped discover C60 with Rick Smalley. (you know, buckey balls). Professor Heath now tries to find ways to help identify proteins that are associated with disease.

Lumera is making a machine that would make this process easier and more accessible to non-experts. The company also dabbles in electro-optics that could revolutionize the way companies transfer data among its workers. Basically they make a machine that acts as a high bandwidth wireless LAN.

They reported earnings today and the stock plunged 11% after hours. Their revenue was up but they lost 0.70 cents for the year compared to losing 0.63 cents the year before. Lets look at the chart and see if that is a bad thing.

First of all, notice that the stock broke its downtrend line on higher volume. The stocks then pulled back on lighter volume and tested the trendline breakout point and the 200 day moving average. Tonight the stock plunged down all the way to 3.88 in after hours trading but then pulled back up to 4.05. If it can pull itself back up even further so that it is above the 200 dma then I would be very optimistic about LMRA.

It should be interesting tomorrow. This is a very speculative stock, so be careful.

Quiet market and gold

Dull market today.

I have to admit that I've become a bit more interested in gold recently (More Tom O'Brien influence). I've been looking for a spot to dip my toe in the water and, after reading a Mark Hulbert article today, I think I've got a possible entry point.

Go check out the article. It basically says that every gold timer newsletter he tracks is very bearish on gold and from a contrarian point of view, this is very bullish for gold.

I'm looking for some cheap mining stocks with big growth potential. Check out:

Anooraq Resources corp. (ANO)
Harmony Gold Mining Co. (HMY)
Tanzanian Royalty Exploration (TRE)
Hecla Mining Co. (HL)

Hittite Microwave (HITT)

Here is a chart that has recently caught my attention again. Hittite Microwave (HITT) has had solid earnings growth. Hitt was a real high flier when it reported slightly lower revenue in October 2006 and subsequently received a 10%+ haircut (first gap). It traded lower and has recently shot back to $44 on a great earnings report (second gap). Look for the stock to trade back down to around $38 (on lighter volume of course).

I'll be a buyer at that price.

MEMC Electronic Materials (WFR)

MEMC Electronics (WFR) is holding up extremely well! If the relative strength continues I'm definately going to pick up some shares again.

Remember, the most important thing to be doing during a correction is keeping a good CANSLIM watch list and acting upon it when the market has a follow-through day.

If you get bored, eat some Cadbury Eggs. They only come once a year!

The Far East Selloff Continues

The Nikkei is down 2% in the first half of the trading day along with Shanghai. All of the American index futures are testing out the recent lows.

Should be another exciting day!

If the futures hold I might get long at the open.

IBD and this correction

I'm pretty disappointed by the market timing methods of IBD during these last few months. Neither the S&P 500 or Nasdaq distribution day count methods predicted last Tuesday's selloff. IBD tracks these days and recommends going into cash when there are 4 or 5 distribution days within four weeks. Luckily for me, I have been cautious mainly because of the guidance of Tom O'Brien. It was with this caution that I was able to act quickly when the market gaped down.

It was a matter of luck that the "Ask Bill" segment on the Tom O'Brien show aired this last Wednesday, where people get to ask Bill O'Neil about his investing strategy. During the interview someone asked if we were in a correction now even though the S&P and Nasdaq only had two distribution days. In a smug tone, O'Neil replied that the Dow Jones Industrial Average had shown 4 days of distribution prior to the selloff. I'm sorry, but your paper doesn't track the Dow industrials Bill, so a lot of good that does us. It is this kind of after-the-fact analysis that gives technical analysis a bad name. It also really irritates me a scientist.

So here is the chart of the DOW. An average that I have consistently heard people disregard due to its small size (only 30 companies). The take home message here is that IBD's market timing method isn't perfect.

Bullish in the short term.

Good news. I was just listening to the Tom O'Brien show and it turns out that he turned bullish at around 3 pm eastern time. He loaded up on the QLD's.

Wow, its a good sign if I'm thinking like Tom.

QID Crash Trade

The market picked a terrible week to get so exciting (at least for me). I had a conference to attend all week and my future wife was in town (we are living apart for a few months). Nevertheless, I was able to get into all cash, put down a sizeable QID bet and make some gold buys.

First, check out my QID trade that began with the huge downdraft of Teusday. Like I said before, I made the buy just after the market opened on Teusday. I got in at about 52.59. I closed the trade today just before the close at 56.35. That is a 7% gain in four days. Not bad.

I closed the trade because I'm looking for a big bounce. I almost bought some calls or the QLD (double the Nasdaq) just before the close today but just didn't have the balls. I will look to jump on board the bullish side at the open on monday.

Earlier in the week I also bought some shares of Harmony Gold.

CNBC

Wow, CNBC is so pathetic. I feel sorry for Becky (my future wife) who had to witness me screaming and laughing at the coverage after yesterday's "rebound". Just look at the headline. (Back on Track The rebound is here and the bull ride is on)

I wonder if these guys have every traded a stock? Have they ever looked at a chart?

50 point gain after a 400+ loss is a recovery?

Just get short on the next bounce or get out of the way!!!

Picture this

Looks like the higher highs on lower volume couldn't last all that long.

Bad time for a conference

So I'm at a conference and can't give the market my full attention. Too bad because I missed a doozie.

I already posted the fact that my SIMO position was stopped out today, which was a real downer. It sure sucks to have a 12% gain turn into a loss just because my broker couldn't process my order fast enough.

On the plus side, I reopened a sizeable QID position again. I did this just after the open. Although the QID was already up 3.5% I didn't want to miss a possible crash. Long story short, I easily made up for my earlier SIMO loss when the Nasdaq continued to go down.

I'm going to look to add more of the ProSHares Ultrashort on any bounce.

OUCH!

The panic this morning triggered my stop loss on SIMO at 19.87. The problem is that it wasn't filled until 19.13.

Of course SIMO is now trading back at 21. That sucks!

Flotek Industries (FTK) Price and Volume Warning!

Don't get me wrong because I love Flotek. The company is great and should have bright future but the chart is flashing some warning signs. Most importantly, FTK is making some new recent highs on dramatically lighter volume. I have posted a candlevolume chart to help illustrate this point. What is clear is that institutional investors are not interested in buying FTK at these levels. There have been some relatively high volume selling days in the early days of January and February.

One should keep a close eye on FTK, especially with earnings coming up soon. If you are interested in buying, you should wait for a pullback.

Growing readership

Not much to say except to show how much my audience has grown since I started. I'm gunning for Barry Ritholtz type numbers. Check out "The Big Picture" stats below.

Looks like I still have room to grow.

The market is strong, but...

My QID trade was finally stopped out today.While it was up over 8% at one point, I only took a 2% loss. I was gunning for a big drop in the NDX and it just didn't happen. No big deal.

Now that I'm back to a 60% long and 40% cash position I'm sure that the market will crack soon. What is particularly troubling is that I saw that Jim Jubak had a very bullish article today. Considering his record at market timing, it might be the perfect time to reestablish my bearish stance.

My CanSlim screen

I'm going to start posting the results of my own version of Bill O'Neil's CanSlim stock selection screen. This has been a great way to spot stocks before they show up on the IBD 100. Some of these companies are thinly traded and should be treated very carefully. Always cut loses short and don't mess with cheap stocks or those that trade on the pink sheets. Click here for the screen.

I'll start with an example that has frustrated me ever since it exploded. Almost Family (AFAM) has showed up on my screen for months. This company interested me mainly because I liked the story. It provides in-home nursing care for the elderly. Most of the old folks that I know hate the thought of a nursing home and considering the ageing baby-boomers, AFAM seemed like a great stock to keep an eye on. I watched AFAM flatline for the months of August and September and began to wonder if it would ever break.

Well break it did, but to the downside in early October. I found no news on the company and eventually stopped watching, figuring that something was not right. As it turns out, nothing was wrong, it was just experiencing a classic shakeout. In early November, AFAM exploded to the upside on huge volume. If I was still watching, I would have been tempted to jump in. I'm not sure if I would have bought, but since I wasn't even watching the chart, I will never know.

"It's like lotto, you've got to be in it to win."

The message is simple. If you find a good story and a good chart, keep it on that watchlist. Don't get lazy.

Interesting Paper

I was reading some papers the other day and came across a very interesting paper regarding the 1987 stock market crash. What was particularly interesting was that this paper appeared in Physical Review Letters, which is probably the top physics journal in the world. (I have one paper published in it and have another being reviewed.)

I'll try to summarize the basic points of the paper. Usually stock prices move in small increments that can be modelled by a Gaussian distribution (bell-curve), with large price moves being less probable than small ones (The Black-Scholes model). The authors analyzed a 2-month period surrounding the market crash of 87 and found that there were large fluctuations that were equally probable on many different time-scales in the weeks preceding the crash. Basically it was a breakdown of the Black-Scholes model and made a crash much more probable.

Interestingly, this behavior is quite similar to the behavior of electron spin in a phase transition of a ferromagnetic metal, or in the behavior of heart muscles between heartbeats.

The authors think that their method could help analysts asses risk.

A very interesting paper, indeed. The link is here, but you need to access it through a local library or university.

Electronic Data Systems (EDS)- The perfect cup with handle

I know that I've been bitching about this market's not stop move up, but I have actually been finding some pretty good trades. I hope I don't give back all of my gains trying to anticipate the downturn.

I picked up some shares of EDS yesterday (2-14-07) while the stock was still within 5% of the 28.03 buy point. Check out the chart. It is probably the best looking cup-with-handle pattern that I've ever seen. It is textbook!

Bye bye mr. bear

My QID is just $1 away from my stop loss point.

Here is my prediction. A pop in the market in the very near future, thus triggering my stops, followed by the beginning of the 20% market correction that every Tom, Dick and Harry is calling for. (Remember QID goes up when the QQQQ go down)

Here is a comforting post on Decisionpoint.com for you bears out there.

On the plus side, SIMO had a nice day today.

Just give up bears!

This market will never correct until the bears finally give up. We have had record short interest on the NYSE for months now. Hopefully today did something to help cull the heard a bit. My problem is that I would like to play the long side more, but I can't find any stocks that breakout and continue up. Everything seems to just whipsaw back and forth.

I would like to see a pullback for the overall health of the market. The more we climb this "wall of worry" the more severe the correction will be. I don't want to see a mini-bubble followed by a mini-bear market.

My chart of the day is the S&P 500. How long can this divergence between price and volume continue? It sure seems weird.