Wild Weekly Wrap Up: Advanced Pattern Recognition

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 |  Includes: AAPL, APOL, BAC, BBY, BCS, BP, BRCD, CHK, CS, DIA, FMCC, FXP, GLL, GOOG, HAL, INTC, JPM, MTN, NMR, OIH, POWR, QCOM, QQQ, RIG, SIRI, SSO, STP, SUNEQ, SVU, TBT, TNA, TZA, UNG, USO, VLO, YRCW
by: Philip Davis

What a fine and predictable week it was!

How can you not have fun when the market does exactly what you expect it to do every day? Why it’s almost as if we stole Goldman Sachs' evil playbook (and the Russell once again is at 666) so we too can make profits EVERY SINGLE TRADING DAY - just like they do! This is a real testament to my famous saying:

We don’t care IF the game is rigged, as long as we know HOW it is rigged so we can place our bets accordingly.

Remember it was last summer that Goldman’s secret trading program was stolen. At the time, Goldman Sachs asserted that:

There is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.

I believe this was a misquote and what Goldman (NYSE:GS) meant to say was that there was a danger someone ELSE could use it to manipulate the markets in unfair ways. Was it just a coincidence that the indictment of computer thief Sergey Aleynikov on Feb 11th coincided with the beginning of this year’s massive rally or was that the day GS regained sole control of their pet program?

Does this sound conspiratorial? Well perhaps then you haven’t read Tim Lavin’s "Monsters in the Markets," where he points out:

Algorithms now trigger 70 percent of all trades in U.S. equities. The speed and volume of everyday trading have propelled the market into a new and esoteric dimension, and rendered traders in the pits largely obsolete… At least a few high-frequency traders have learned to make a killing by detecting the more simplistic algo strategies deployed by basic pension funds and mutual funds, buying the next stock the funds plan to buy, and then selling it to them at a higher price. This may not be illegal, but it’s almost certainly unfair to the funds’ investors. “It is increasingly clear that there are quite a number of high-frequency bandits in the high- frequency-trading community who pump up volume statistics, front-run investor orders, increase transaction costs, and hurt real liquidity,” according to former NASDAQ vice-chairman David Weild.

We certainly know better than to trust our money to fund managers! Last Friday ("Pattern Recognition 101"), we determined that the TradeBots were following the rally pattern we now call Omega III. That meant we expected the day to finish near flat (like Feb 13th) and that the following week (this week) would look like the week of February 16th: (Click to enlarge)

Click to enlarge

What we should have taken into account was that Feb 16th was a Tuesday, as Monday was President’s Day so, my bad, and the Bots filled the gap with an undecided day on Monday before the big push on Tuesday:

We are a little closer to that 1,120 line and we attribute a lot of the enthusiasm this week to end-of-month "window dressing" as funds try to impress you with their performance at the end of the quarter. We flipped short into Friday’s close as we felt that A) The rally was fake, B) We were close to overhead resistance and C) because the Omega III pattern predicts two selling days ahead anyway.

Of course, these are just our short-term bets that we flipped bearish on, we are still very happy with all the long-term plays we picked up while everyone was in panic mode two weeks ago and we have our Top 20 Buy List (perfectly timed on June 7th!) as well as our aggressive list of plays with 500% upside by Jan 19th if the markets keep climbing so. Of course, we want to play cautiously against short-term corrections to protect our long-term positions. If we don’t head lower next week - then we will happily take small losses on the short-term hedges as we make another advance towards our long-term goals.

As I mentioned in last week’s wrap-up, we had upped the ante on the bullish side on Thursday, with our list of plays aimed at turning $10,000 into $50,000 by Jan 21st and, we made enough money on last week’s open calls to take them off the table this week as we topped out. We don’t slavishly believe we will follow the pattern through up an up. There are still many grave macro concerns to consider so we do take our profits when they get silly and our short-term bullish profits were getting silly indeed:

  • Valero (NYSE:VLO) July $17 puts sold for .97, was .82, now .35 - up 63%

  • OIH July $89.10 puts sold for $5.70, was $2.30, now .67 - up 88%

  • Transocean (NYSE:RIG) 2012 $35 puts sold for $9.20, was $9.10, now $6.70 - up 27%

  • Vail Resorts (NYSE:MTN) stock at $38.50, was $39.09, now $40.53 - up 5.3% (Oxen Idea)

  • QQQQ July $45 calls at $1.08, was $1.65, now $2.50 - up 131%

  • DIA July $105 calls at $1.10, was $1.30, now $1.73 - up 57%

  • OIH July $89 puts sold for $3.25, was $2.30, now .67 - up 79%

  • TNA June $38/41 bull call spread at $2.20, was $2.20, expired at $3, up 36%

  • TNA June $38 puts sold for $1.80, was .90, expired worthless - up 100% (pair trade)

  • DIA July $105 calls at $1, was $1.30, now $1.73 - up 73%

Those were ALL of our unhedged, open positions into last weekend. Not a bad group of suggestions, was it? I will point out that even PSW Report subscribers, getting these trades as late as last weekend (the "was" price), could have still had a fantastic week, especially following up on our slower trades. Once we fill our positions, we are happy to share them but do be aware that we exit when the momentum stops so DON’T BE GREEDY! Unfortunately, as membership is closing for the summer next month, this will be one of the last times we do publish our open positions for the general public as the point was to allow non-members to follow along and get a free preview (and hopefully make some money). Still, for now, please, enjoy:

Click to enlargeWeekend Reading - Default or Hyperinflation for US?

This article pretty much sums up my macro view of things. It has now become "en vogue" to talk about global austerity and deflation. But, if that’s the case, why is gold at $1,250 an ounce? If belts are being tightened then money supplies tighten too and gold becomes worth less (worthless?) to the dollar. If the economy is going down and we drift into deflation, then what is it gold is going to hedge you against? What the Hell, then, is the media talking about?

Under what premise do we say BUYBUYBUY gold while cutting budgets and paying down debts and allowing unemployment to fester and begin a deflationary cycle that drives down prices? Belt tightening and deflation might make sense if we DIDN’T have a $15Tn debt already, it might make sense if we didn’t have $75Tn of unfunded liabilities already - BUT WE DO! So deflation = default, whether now or next year or the year after, there is NO WAY deflation will "save" us and the proponents of NOW trying to scrimp and save AFTER we had a $90Tn party and the bill is due are not just unrealistic - they are IDIOTS!

Click to enlarge

Just like anyone or any company that is in debt and needs to survive and avoid bankruptcy - America needs to get back to work. We wasted $4Tn stimulating and bailing out banks (including Fed asset purchases) and we have done NOTHING for the American people. The people should be revolting but instead 580 MILLION votes were cast for American Idol, while our President, who had 63M votes and Congress, some of whom got elected with as little as 50,000 votes, continue to sell out our national interests to Bankers and Big Business. Man are we stupid….

Just Another Manic Monday - The Deja Viewpoint

What else can I do? I started the week off pointing out that we were perfectly following the Omega III pattern. I pointed out that we had even been able to perfectly play Friday’s gap down and rally back reversal because it was EXACTLY what the pattern was supposed to do. I said everything there was to say for the week right in the Monday morning post:

Today we are hopefully going to stick to the Feb 16th plan and finish just short of our breakup points so we can have a successful "Testy Tuesday" tomorrow. If you look over our SUPER BULLISH positions in the Weekly Wrap-Up, you can see how happy that will make us so keep in mind that we are unusually biased this week as our usually market neutral stance has tipped as bullish as it gets the past two weeks.

So it’s going to be a race to amass enough good news before the first round of FIFA eliminations puts the EU back to work, which will coincide with the G20 meeting at the end of the month. It was very easy for us to be very bullish last week, now we have good enough news where not breaking our levels (which are, I will remind you, the LOWER levels of our ranges) will be a very serious sign of trouble so the theme for this options expiration week for our bullish plays is likely to be: "Take the Money and Run" unless we can decicively punch through our levels.

The levels we were looking for were: Dow 10,250, S&P 1,100, Nas 2,260, NYSE 6,820 and Russell 666. But, in my morning Alert to Members at 9:51, I upped our "caution" line to include NYSE 7,000 as the NYSE had lost considerable ground since February and I thought 6,820 was being too generous. The NYSE failing to retake 7,000 and the Russell struggling at 666 got us to take the money and run on the short bullish plays this week and flip a bit more bearish into the weekend - just in case…

  • TZA January complex spread - on target

  • Bank of America (NYSE:BAC) January buy/write - on target

  • Brocade (NASDAQ:BRCD) 2012 buy/write - on target

  • TZA $6 calls at .63 (avg), out at .77 - up 22%

  • Apollo (NASDAQ:APOL) July $40/June $45 put spread at .46, now .64 - up 43%

  • APOL July $55 calls at $1.15, out at $1.40 - up 21% (pair trade)

  • Qualcomm (NASDAQ:QCOM) January artificial buy/write - on target

  • Halliburton (NYSE:HAL) 2012 buy/write - on target

  • SSO June $36/37 bull call spread at .52, expired at $1, up 92%

  • SSO June $35 puts sold for .45, expired worthless, up 100% (pair trade)

As you can see, we went on quite the bullish shopping spree as we thought the sell-off was a gift. As I said in my closing comment to our Members at the end of Monday’s session:

On the whole, I think that was a gap-fill and a healthy pullback but they sure did make it ugly-looking!

Testy Tuesday - Are We There Yet?

The futures were doing well but then we got sandbagged by the tag-team of DOOM, Nouriel Roubini and Mohamed El-Erian. They were part of the parade of the damned on CNBC that depressing morning. I often call Mohamed and his partner Bill "bond pimps". I said that morning that El-Erian should have to make a simple disclosure when he is spouting off on TV to the effect of "You know, I do well when the market does badly so it’s in my interest to spin everything negative and scare as many people into bonds as possible because I’m sitting on $1,000,000,000,000 worth of them."

I didn’t get one e-mail complaining that I was unfair to Mohamed. But boy did I get get an earful for calling Dr. Roubini a one-trick pony, who is being used by the MSM as a tool to instill fear in the hearts of investors. They trot him out on TV to do his little show whenever sponsors like Pimpco or other Gang of 12 need to give the markets a push down. I respect Dr. Roubini and I agree with much of what he says. However, if the guy is being used I am going to point it out - especially to the investing public he is being used to scare. So, just to clarify - I do not refute Roubini’s findings. I simply object to the way his findings are being used to generate fear and volatility in the marketplace in ways he might not be aware of. Cramer, on the other hand, is very aware of what he’s doing to people and he disgusts me - so I hope that is clear as well…

Despite the poor-looking open, I maintained my bullish stance Tuesday morning, saying:

The Dow was at 9,500 and heading higher a year ago and we’re 10% stronger now so I maintain that my 10,700 target (1,145 on S&P) is a very fair value for equities coming into next month’s earnings. If we can escape margin issues, then we will have room to test the next 5% move up in our range but I’m perfectly happy if we drift along the low end for now, between 10,200 and 10,700 and that’s our hope for this week - to re-assert ourselves over our bounce levels, which will hopefully become a floor for a sustainable trading range going forward - not the V-shaped nonsense we had in March and April."

  • TZA January complex spread - on target

  • DIA June $105 calls at .15, out at .32 - up 113%

  • Best Buy (NYSE:BBY) January $37 puts sold for $4, now $3.85 - up 3%

  • BAC 2012 complex spread - on target

  • BP (NYSE:BP) July $30/32 bull call spread at $1, now $1.20 - up 20%

  • BP July $26 puts sold for $2.15, now .92 - up 57% (pair trade)

  • YRC Worldwide (NASDAQ:YRCW) at .21, now .23 - up 12%

  • Google (NASDAQ:GOOG) June $480 puts sold for $2.40, expired worthless - up 100%

  • BP October $33/July $33 ratio backspread (3:5) at net $225, now $460 - up 104%

  • TZA July $7/June $6 spread at net .08, now .12 - up 50%

  • Sirius (NASDAQ:SIRI) 2012 buy/write - on target

  • SIRI 2012 $1 puts sold at .33, now .26 - up 21%

  • FXP July $35 puts at .95, out at .95 - even

  • JP Morgan (NYSE:JPM) 2012 artificial buy/write - on target

We were still in bargain-hunting mode early on but, like any sale, the really good stuff was picked over by the end of the day. Don’t forget, we’ve been buying since the beginning of the month as the S&P first tested our 1,070 line so we already have our fill of blue chips at much lower prices than we saw this week.

Click to enlargeWill We Hold It Wednesday - Oil Slippage

Obama gave an energy speech on Tuesday night that left me far less than pleased. Jon Stewart did a better job than I did of making fun of it in a post Paul Kedrosky very aptly titled "Funny and Sad." I rolled out my own energy plan, which goes into effect the moment I am appointed Caesar in the New Republic (because there is no way I’m going through that election BS) and right after I roll a few heads, probably as part of the coronation ceremony.

Having already hit the top of our expected run for the week, I pointed out that we were both bullish and skeptical about the rest of the week. We kept our eye on Spain, where the crisis still threatens to boil over at any time but, lacking any actually NEW news, we let our levels be our guide but you’ll notice how our mix of picks begins to change over the next 3 days as we stop taking bullish short-term bets and look to lock in our bullish gains and prepare for a possible pullback. In my morning Alert to Members at 9:43, I said:

We need that Russell to hold it together today and we’re not really happy with the NYSE below 7,000, which I know is harsh but that’s the difference between enjoying a bounce and actually starting to feel secure.

We’ll see how the morning goes but I’m for being very well balanced here as we’re likely to flatline into expirations on Friday anyway. Then we’ll have to wait until next week to get a real feel for where we’re going (and it’s almost time for earnings again!).

  • Supervalu (NYSE:SVU) 2012 buy/write - on target
  • Suntech (NYSE:STP) January buy/write - on target

  • TZA January complex spread - on target

  • PowerSecure (NYSE:POWR) January buy/write - on target

  • UNG artificial buy/write - on target

  • Chesapeake Energy (NYSE:CHK) 2012 buy/write - on target

  • Freddie Mac (FRE) at .55, out at .75 - up 36%

  • USO July $33 puts at .51, now .47 - down 8%

  • Intel (NASDAQ:INTC) January artificial buy/write - on target

  • RIG 2012 buy/write - on target

  • MEMC Electronic Materials (WFR) January buy/write - on target

At 3pm I warned Members:

We are still looking toppy here - not feeling the breakout and BP is driving what rally we do have.

And I had already reminded them earlier in the week:

Don’t forget - it’s not a profit until it’s cashed and back in your pocket - don’t leave gains on the table if you have ANY doubts we’re going to hold out levels.

Hopefully, everyone has that concept down. My closing comment at 3:58, was:

Notice S&P NOT holding 1,115, RUT right on 666 line, NYSE still not at 7,000. We’re holding up but it’s an ugly hold.

Click to enlargeJobless Thursday - Productivity and Prices are Peaking

I put up a Dow chart for the morning and painted our top line of resistance on the Dow, based on our 5% Rule, at 10,455. Where did we finish the week? 10,450. Just as I said in the morning post:

Close enough, right? Of course we don’t base our decisions on pattern matching (which can give you many false positives) but when we feel the fundamentals are the same AND the market movement looks the same, then we get pretty interested in watching how that pattern is playing out! so today should be a flat day and we most likely flatline into expirations, which would be good as we still need to form a base but the question remains - do we have enough good news and data to take us back to the top of our range at 10,700 (1,140 on S&P)?

I think laying out the market moves for the next 48 hours is a pretty good way to start a Thursday, don’t you? Our friendbuddypal Jim Cramer must have let his PSW subscription lapse because he simply had no clue what was going on in the markets. He had a little temper tantrum which we talked about in the morning. He was dead on with his Shakespearean close though as his show is certainly "a tale told by an idiot, full of sound and fury and signifying nothing" and now I’m wondering if his own staff is starting to hate him and feeding him these fall-guy lines…

I predicted a dip, we had a dip (poor Philly Fed at 10, weak Leading Indicators). I predicted we’d recover from it and we recovered - yawn… Actually boring is good, boring means we’re in synch with the markets and making the right moves at the right times. We even caught the fake, Fake, FAKE move in the Yen as it was being pushed up against the dollar like some reverse version of Sysiphus’ stone, constantly gaining ground against the dollar no matter how hard they tried to push it back down every night. Unfortunately, my biggest concern of a new rally killer was the possibility of EU stress tests. Now it looks like they are on the table - one of the main reasons we flipped more bearish ahead of schedule.

  • GLL July $37 puts, sold for $1.30 (avg), now $1.50 - down 15%

  • QQQQ July $46 puts at .85, out at $1.05 - up 23%

  • Apple (NASDAQ:AAPL) June $270 calls sold for $3.10, out at $2.45 - up 20%

  • AAPL July $280 calls at $6.75, out at $8 - up 18%

  • TBT July $38 puts sold for $1, now .95 - up 5%

  • TNA June $47 calls at $1.20, out at $1.60 - up 33%

  • Copper futures at $2.9085, out at $2.915 - up $12.50 per 0.0005 per contract!

  • OIH June $104.10 puts at $2.02,

  • TBT 2012 buy/write - on target

  • TBT 2012 complex spread - on target

  • INTC 2012 artificial buy/write - on target

I called an end to short-term bearish plays just before the turn, at 3:19, saying:

Volume at 3:15 is 99M on Dow, still super-stickable so take those short profits!

At 3:51 I said to Members:

LOL - Look at what candle we’re forming today and compare it to the Feb 19th candle in the morning post. We are still right on that track!

Just after the close, at 4:19, I concluded:

That was some very insane sticking today - you can see why I’m so quick to take profits off the table! Obviously, there was no news or any other justification for it - it’s just a goose to make us look positive so the international spin cycle can continue into Friday’s close so Nomura (NYSE:NMR) can make their numbers, and Credit Suisse (NYSE:CS) and Barclays (NYSE:BCS) can make their numbers etc.…

Note the Russell is once again at 665.85 - those last 0.15 points are still too much for it. NYSE at 6,982 and they haven’t hit 7,000 yet.

Flatline Friday? Economy and Markets on Hold

We love day-trading during expiration week and I was very jazzed to discuss it. We are not really a day-trading site but we have our share of day-traders and, frankly, in this choppy, crazy market - it’s a great strategy and, since our overriding strategy is to "go with the flow," we end up doing more day-trades than usual because A) We still have a ton of cash on the side (75%) and B) Our long-term positions are well-hedged so it’s like watching paint dry waiting for the broader market to pick a direction.

We usually do not intend to make day trades but if we blow past my 20% targets in a single day - you can be damn sure we’re going to take it off the table! Making 20% in a single day is a run rate of 4,000% over a year’s worth of trading days - unless your normal ROI is better than 4,000% annually - it is just plain stupid not to take 20% or even 10% profits when offered up in a single day. With stock trades, that expectation drops down to 2% and you’ll find the bulk of David’s picks do look for 2-5% gains - one of the reasons I love his style!

Paul Krugman and I were both outraged at the irresponsible fiscal rhetoric (the part where they want to act "responsibly" all of a sudden). I went in to one of my bi-monthly liberal rants that was really a continuation of the topic we were pursuing in Member chat the night before. I was very concerned about the effect increased taxes will have on 100M retiring Baby Boomer’s long-range planning. But no one else in the media seems concerned so I guess I won’t worry either. As I said in Friday morning’s post:

It’s options expiration day and it’s my job to take care of my people and make sure they can take advantage of this nightmare and make some money because we damn sure won’t be able to count on Social Security to get us through retirement.

On options expiration day we like to take small gambles I call "craps rolls" as they are pure risk and we don’t play for more money than we would be willing to lose on the roll of the dice in Vegas. They are fun, high-risk, high-reward trades but still - not so much fun when we lose!

  • TZA July $6/8 bull call spread for .55, now .50 - down 10%

  • TZA July $6 puts sold for .50, now .42 - up 16% (pair trade)

  • DIA June 30th $103 puts at .83, still .83 - even

  • USO June $35 puts at .23 (average), out at .10 - down 43%

  • USO July $33 puts at .50 (avg), now .47 - down 6%

  • DIA $103 puts at .05, expired worthless - down 100%

  • GLL July $37 puts sold for $1.40, still $1.40 - even

  • AAPL January artificial buy/write - on target

  • SSO July artificial buy/write - on target

  • DIA June 105 puts at .50, out at .60 - up 20%

At 1:13 I noted to Members that the action for the day was winding up, saying:

1pm - that may be about it for the fun kids

and at 1:33 I pointed out:

RUT still at 666… Notice [the RUT] and the NYSE (6,984), which are the two hardest indexes to manipulate, are both below their breakouts while the others are well above. Very suspicious.

Although we went bearish into the close, the second to last trade we added was the short-term 300% upside SSO trade - just in case our bear call gets burned with one of those famous Manic Monday moves up.

Click to enlargeWe are now torn between fundamental concerns that tell us we may still get a sharp correction back to 10,200 at least. And then there's the Omega III chart pattern that has now been holding up for over a month. The July losers on Friday were necessary to balance us out into the weekend as we are pretty long-term bullish overall. Sadly, they messed up a nearly perfect week with just 2 misses in our first 56 trade ideas (including Friday’s carry-over 10 for 10). But the 4 for 10 performance on Friday dragged us down to 6 misses on 66 trade ideas this week. That's not terrible, but I’m mad at myself in retrospect for not just sitting on the TZA covers and sitting options expiration day out. Just because we’re way ahead doesn’t mean we should gamble!

We’ll see if our pattern holds up yet again next week but, if it does, it’s going to be a dull one although, if we do get that dip and hold it early - we will have a chance to hit the Buy List one last time before it’s too late to catch all the bargains.