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Chris Vermeulen
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Chris Vermeulen the founder of AlgoTrades.net Algorithmic Trading Systems. This automated investing system is designed for individual investors and traders. He is also the editor of the TheGoldAndOilGuy newsletter which is designed for gold market traders providing quality ETF Trade Alerts,... More
My company:
AlgoTrades Algorithmic Trading Systems
My blog:
TheGoldAndOilGuy - Gold Market Traders
My book:
Technical Trading Mastery - 7 Steps To Win With Logic
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  • The S&P 500 Is Going Lower . . . Sooner Rather Than Later

    On Wednesday, January 28, 2015 it was early afternoon during the trading day and I arose from my screens to go grab a drink out of my refrigerator. In the process of grabbing a drink, I went out to see what came in the mail and to get a few moments of fresh air before the final hours of a fairly quiet trading day were through.

    Upon reentering my office, I noted that my screens were flashing red and the S&P 500 was under assault from the sell side. I scanned several independent blogs I follow for a headline and came across nothing. It was at this moment that I did the unthinkable and I turned on CNBC. I am embarrassed to even admit it frankly, because the drivel CNBC and most of the financial media spew out might as well be sales material for the sell side and their "long-term investment view that is always bullish".

    I saw the S&P 500 under pressure and then a subsequent bounce occurred. Nothing major, not even what I would call a major retracement, just some short sellers locking in a few profits I presumed. To my absolute horror, seconds later I recall seeing the headline at the bottom of the television screen on CNBC dictating that "stocks were off their lows". It is no wonder CNBC's ratings are absolutely terrible.

    While I am picking on CNBC, the mainstream financial media is just awful. In fact, I do everything in my power to ignore all sources from televised media such as CNBC and Fox Business to written media like the Wall Street Journal. In every case, every day stocks are going higher and they can never go down. Certainly with central bank omnipotence and sorcery, it will not be long before no one has to work and we will just own long only stock portfolios. :)

    Regardless, I am an options trader who has weathered the storm fairly well. I sell premium, focus on implied volatility, and I use probability to build my trades. My style is similar to Tom Sosnoff's for those following him on TastyTrade or Dough, but I mix in a few twists. Regardless of my trading style, I have a strong historical track record that I am proud of which has handily beaten the markets for several years, although 2014 was one of my worst year in recent memory.

    The reason I mention this is simply to state that I am a trader first, and newsletter operator second. I am getting rich with my newsletter at $20 per month let me tell you. Honestly, I just send out trades. No fluff, no nonsense. I tell it like I see it and I admit when I am wrong. My trades typically have a 60% - 70% probability of success at the time of entry based on implied volatility calculations involving probabilities. At the end of the day, I trade options because I am a junkie . . . I absolutely love derivatives and trading them.

    As such, some of my recent research at various independent blogs paired with what I can see in the options marketplace has led me to believe that the S&P 500 Index (SPX) is going lower in the next 6 - 12 months. I want to be clear that I am not calling for a crash nor am I saying that the S&P 500 Index will remain under pressure, I am just simply calling for a correction in the very near future, although the situation could deteriorate into something much worse potentially.

    However, here are a few data points worth considering which were originally posted by Tyler Durden at www.zerohedge.com:

    "Revenue results are correlated to dollar strengthening, which has led to weaker revenue results and lower forward guidance that incorporates the FX headwind."

    "Anecdotally, management commentary implies the dollar strengthening will lower revenue growth by 300-500 basis points. Foreign sales accounted for 33% of aggregate revenue for the S&P 500 in 2013. Based on our earnings model,a 10% strengthening of the trade-weighted dollar lowers S&P 500 2015 EPS by about $3." To dig deeper into this, click HERE to view the entire article.

    Obviously a strengthening U.S. Dollar is likely to push stocks lower based purely on earnings. However, valuations also matter and according to the same zerohedge.com article, "Consensus long-term growth estimates are slumping… which means multiple expansion is the only way to keep the dream of wealth creation alive."

    I have to say that I get a great deal of sound, independent information from zerohedge.com which I find to be very useful for formulating trades. One more interesting chart I found over the weekend in a totally different post on their blog is shown below:

    (click to enlarge)

    So according to more than one article on zerohedge.com, the fundamental picture for earnings is being weighed down by a strong U.S. dollar. The earnings and valuation backdrop in the same article is also concerning in the intermediate to longer-term. Lastly, when looking at the correlation between the Commodity Index and the Baltic Dry Index, we see a sudden shift that places the S&P 500 Index in a major divergence compared to historic norms. Now that I have leaned heavily on zerohedge.com to handle the fundamental side of my research, it is time to dig into the derivatives side of the trade equation.

    When looking at the S&P 500 Cash Index Options (SPX), another interesting observation is notable. When looking out to the June monthly expiration and Friday's closing price in the S&P 500 Cash Index of 1,995, an interesting standard deviation skew appears. The June 1,525 Put is exactly 2 standard deviations from the current price on the downside. The June 2,200 Call is also 2 standard deviations from the current price.

    This means that the market is pricing in about 205 points of upside or about 10.27% potential upside. Conversely, the two standard deviation move to the downside is roughly 400 points or about or roughly 20.04% potential downside. I would point out that the marketplace is pricing in a move of almost 2 times the severity on the downside in the S&P 500 Cash Index options. Pair this market expectation with the fundamental data discussed above, and the potential for serious downside does exist.

    I want to be clear that I am already leaning short the S&P 500 Cash Index (SPX) in my portfolio as my beta weighted Delta against the S&P 500 Cash Index (SPX) is negative overall. However, I have not taken an actual short position in the S&P 500 Cash Index (SPX) or its cousin, SPY . . . at least not yet.

    However, after seeing the U.S. Dollar strengthen recently I was able to enter a February call credit spread in EEM (Positive Time Decay / Profitable if EEM moves lower) for the members only portfolio. That trade will likely be closed for some strong profits in a short period of time. The option trade was taken on January 23rd for a credit of 0.37 per spread.

    Members of our ETF trading newsletter also has a position in an emerging market fund that is setting up for potential 60% move!

    The trade could have been closed on Friday for 0.06 debit per spread. The difference, representing the profit on the trade is 0.31 or $31 per spread. The maximum risk per spread was $113, so the actual return based on maximum risk was 27.43% based on Friday's closing prices. While this is a great return, not every trade works this well and produces profit this quickly.

    While I will be locking in profits in the EEM February Call Credit Spread early this coming week, I intend to take a similarly bearish trade in the S&P 500 in the near future. I may look to go out as far as March expiration to take in additional premium and to buy myself a little more room on my upside breakeven price. However, I will likely move the overall portfolio to a slightly more negative bias in the near future.

    Going forward, when I highlight trades I intend on discussing the trade structure used in the future as well as an ongoing account as to which trades were profitable and which trades did not work. I am excited about the service I am offering and the new, no-nonsense pricing model. I realize newsletters are really a dying business model, but I simply have too much fun writing about my trades and running the service. Granted a little extra spending money never hurt anyone, but I am having too much fun to quit!

    Happy Option Trading!
    Technical Traders Options Team & Chris Vermeulen

    www.thetechnicaltraders.com/options/

    Feb 06 9:51 AM | Link | Comment!
  • Is Borate A Actor Or Rare Earth Element Opportunity?

    Over the last couple of months I have started sharing some insights on the penny stock market. Those of you who follow me know I have been steering clear of the penny stock market since 2011. Back during bull market from 2009 - 2011 investing in these types of stocks was highly rewarding but I don't touch them during bear markets.

    The second half of 2011 this pocket of the stock market collapsed and turned down. Unfortunately barely anyone watches this index so when it turned down in 2011 investors continued to hold onto their penny stocks and expected them to continue to rally with the broad market. But the rally never happened, or at least not yet.

    This index is down 72% which is a tough drawdown to hold and not be concerned with but the good news is that it may be coming to an end.

    What has me intrigued is the fact that this index is testing its 2008 lows which is a great place for it to bottom. And why is this important you may be asking? Well, a rising index has the tendency to move 3 out of 4 stocks with it. And if you happen to fine which sector or hidden gem stocks have the most potential business growth you stand to make a lot of money.

    For example the biotech sector was dormant for nearly 10 years from 2001 to 2011. Biotech's are up 370% on average since the 2011 low. And know that if a sector/index is up 370% you can bet there are a ton of stocks up 500%, 1000%, 4500% also.

    What are Borate and this Rare Element That I like?

    Borate is a chemical compound which uses the chemical element Boron. Boron is not a resource many people know and from my knowledge there are only two companies that produce it and they control roughly 80% of the market.

    Borates are used in 500 products including some of the fastest growing areas like borosilicate glass (LCD screens), ceramics and porcelain enamels, agriculture, insecticides, fire retardants, and high-tech products like lithium batteries, and even medicines. For example an iPad uses 9 grams of Boron in the special Corning glass.

    The price of Boron has rocketed higher in recent years with all the new uses it has. From 2009 to 2012 the price rallied from $250/t up over $700/ton.

    How to Play It

    The two big players in Boron are publicly traded company Rio Tinto (NYSE:RIO) and Turkey's state-owned Eti Maden AS. A position is Rio Tinto does not really give you much exposure as Boron is a small portion of the company's overall revenue.

    The leaves only one other company, Erin Ventures (TSX Venture: OTC:ERVFF). Its tiny, its a penny stock, but it has a ton of great things happening from what I have researched and from communication with their CFO.

    This little company is a 100% owner of a massive Boron rich properly in Serbia. The PEA reports show low mining costs, extremely high grade boron, enough material to last 21 years with a 15 month payback which is insanely fast… They expect to have $97,000,000 per year in revenue once the property is setup and running.

    (click to enlarge)

    Conclusion:

    I like the looks of the long term chart for Erin Ventures. The pattern overall is bullish but with the Toronto Venture Exchange having been in a bear market since 2011 it has pulled the share price down with it. When the venture stocks bottom which could be any time now, keep your eye on this company.

    Not very often you find a commodity that only has 1-2 companies in the world that control a substance. It's almost a monopoly really. And with Erin Ventures being the only pure Boron stock which is 100% owner of a 21 year production deposit of higher grade Boron than the competitors I have to think this will be huge in due time.

    Erin Venture is about to close a round of funding with their private placement for shares in the company so they can start their Boron project in Serbia. If I recall correctly they are looking for all investors especially small ones as they want quality investors holding shares. If you want to be a part of this placement call: Blake Fallis 1-250-384-1999 is their CFO who can provide more info about the company and private placement if you are interested.

    Chris Vermeulen - www.TheGoldAndOilGuy.com

    Disclaimer: I do not own shares of Rio Tinto or Erin Ventures and I was not paid to mention them in my article.

    Tags: ERVFF, RIO, Borate, boron
    Jan 20 8:06 AM | Link | Comment!
  • Gold Still In Bear Cycle?

    GOLD- Well, not a merry Christmas for Gold buyers just yet. We have said in our TMTF forecast service to watch 1190 as KEY support and 1241 would also need to be taken out on a closing basis before we could confirm a new uptrend in Gold and the end to the 5 wave bear cycle. Not quite yet, and in fact in my stock service we have avoided Gold stocks entirely even with the recent temptations to get long because Gold to us is key. If we are not over 1241 then we are not buyers of Gold equities, plain and simple. With 5000 stocks to choose from, why not stick with the sectors that are in the stronger uptrends and avoid those mired in the mud like Gold? For example you could be looking at Security stocks given all the cyber attacks worldwide that are only getting worse. Gold is money as we all know, but a downtrend is a downtrend. Trust what you see, not what you think for best results.

    So right now the problem is we just gave up the 1190 support and the 30 week MA line on the weekly chart is your guide for key resistance to take out. We remain in the sidelines until its taken out. The chart below shows the blue line with the 30 week Moving average resistance, and you can use this same chart for the uptrend in the SP 500 which we have used recently for our subscribers as well. Don't suffer from history bias and the hay days of Gold stocks and Gold, which ended in 2011…wait for the next Hay days to arrive, watch the 30 week moving average line before acting.

    (click to enlarge)

    The SP 500 meanwhile is in wave 3 up from 1973 38% shallow wave 2 lows. That was a quick correction and the waves now are likely to be faster and shorter as we are in Primary wave 5 of this bull cycle, the last stages of the Bull if I'm right. 2131-2138 is your bogey ahead for first Fibonacci pivot resistance on the way to the 2181 target I had out over a month or so ago.

    Join us with a 33% holiday discount at www.markettrendforecast.com

    Dec 25 2:52 PM | Link | Comment!
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