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Chris Vermeulen's  Instablog

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 Big, Bold And Ugly

    Since July of 2014 the big cap stocks have continued to make new highs as investors dump more and more money into the stock market. Overall bullishness on the stock market is now at extremely high levels which typically happen before a major stock market correction and sometimes start a full blown bear market.

    While the average investor continues to become more and more bullish, the market breadth/health has been rapidly deteriorating. Unless you are market savvy you would not know how weak the market actually is and this always leads to strong losses and drawdowns for the uninformed investor.

    What we know and most do not about this rising market, is that the big cap stocks in the SP500 index appear to be holding the overall market up and masking the weakness. So as investors become more bullish at these lofty levels putting more money into generic funds that push the SP500 higher, we see strong selling and unwinding of the more leveraged position like small cap stocks.

    Over the past couple years the SP500 has formed a series of bullish corrections and running corrections. But the current formation is that of a bearish mega phone pattern and these typically point to lower prices.

    SP500 BIG CAP STOCKS: SPY, UPRO, SH

    (click to enlarge)

    THE BOLD STOCKS:

    I have always liked to follow the NYSE index because its a basket of 1900 stocks with 1500 of them being U.S companies. Its breadth/strength makes it a much better indicator of the market performance than the more narrow indexes with less stocks.

    While this index remains in a bull market, it only looks as though it's a few months away from a possible reversal and confirmation of a new bear market.

    (click to enlarge)

    THE UGLY: GM

    If you have ever read Stan Weinstein's book then you know he followed GM share price closely. He believed that what GM did, the stock market would follow, to some extent. GM was/is an early leader of the US economy and stock prices in general.

    The chart below paints a clear picture of the Stage 1 Accumulation in 2011- 2012, and also of the Stage 3 Distribution phase in 2013 - 2014. GM shares have traded down literally from the first week of the year and have now broken below critical support. Things could get interesting…

    (click to enlarge)

    MY TRADING CONCLUSION:

    In short, I remain bullish on the stock market with both my short term and investing outlook but I am very cautious and have closed out several large positions recently. Cash is king and I plan to protect, rather than invest my nest egg when risk is higher than normal.

    Short term trading where trades only last 3-10 days is the way to go at this stage of the game. Some recent winning ETF trades with my ETF newsletter www.TheGoldAndOilGuy.com have been in SCO, a quick bounce trade in UCO, REM, and our current trade as of last week EEM.

    The majority of my investment capital is traded with my automated trading system. It trades the S&P500 index directly in my brokerage account catching these 3-10 day swings in the market saving me time while reducing my emotional attachment to the market.

    Chris Vermeulen

    Nov 25 10:09 AM | Link | 1 Comment
  • Leading Sectors Breaking Down – Internet & Social Stocks

    In July I showed talked about the Russell 2K index and how it was underperforming the broad market. I went on to explain what it likely meant was in store for the US stock market this fall. The outlook was negative, just in case you were wondering…

    This week I want to talk about two different sectors that have often lead the broad market in rallies and corrections over the years. These sectors have underperformed the broad market much like that of small cap stocks, and this does not bode well for investors going into fall.

    In the analysis below I use Bollinger bands and trendlines. Using only these tools keeps the charts clean and easy to understand. In short, once a trenline has been broken that is the first early warning that a trend may be coming to an end. The second is the break of a Bollinger band.

    A combination of these can be taken as a trend reversal and likely the start of a multi week or month correction. This will depend on the chart time frame you are reviewing though. I use a similar method to identify trends with my automated futures trading system.

    INTERNET INDEX FUND ANALYSIS

    (click to enlarge)

    SOCIAL MEDIA INDEX FUND ANALYSIS

    Futures Trading System

    If you are wondering what exactly these two charts are pointing to… let me share my outlook.

    Because we have seen the support trend lines broken to the downside this month, and the fact that price has pushed more than 2 standard deviations from its norm, the odds favor more downside is to come.

    From years of experience trading price patterns and breakouts I know that when price breaks to the downs side and triggers fear among its investors it is typically your best time to sell short so you can profit from the falling prices. Fear is the most powerful force in the stock market and it must be traded much differently than when prices are rising.

    Although I feel the broad market is still within its uptrend, these two underperforming sectors may just continue to sell lower. Obviously once the broad market rolls over, these sectors should fall even faster to the downside but until then, they could chop around and grind their way down.

    Like My Simple Analysis & Tips? Join My Free Newsletter at www.GoldAndOilGuy.com

    Want My Trades Automatically Trade for You? www.AlgoTrades.net

    Chris Vermeulen

    Sep 23 10:49 AM | Link | Comment!
  • Option Skew Points To More Downside Potential In The Nasdaq

    By now it is no secret that equity markets continue to deliver solid gains for 2014. In fact, all of the major U.S. domestic stock market indexes are higher for the year. U.S. equities have benefited from an accommodating Federal Reserve, massive corporate stock buy-back plans, and solid earnings growth. The bullish trend which began in early 2009 has pushed equity indexes to several all-time highs. QQQ DIA, SPY, IWM

    However, when we focus our attention on 2014 one index is showing major relative out performance. The Nasdaq Composite and the Nasdaq 100 indexes have blown away every other major index in terms of overall returns in 2014. The chart shown below illustrates the returns of each major U.S. equity index year-to-date.

    (click to enlarge)

    As can be seen above, when looking at the corresponding ETF for each major index, the Nasdaq 100 (NASDAQ:QQQ) is running away from every other major index in terms of performance. As a contrarian trader, I am of the opinion that now may be an excellent time to consider looking for a possible short position to hedge against the bullish trend.

    The equity markets in the United States are becoming frothy and prices are at the very least fair valued if not overvalued depending on which methods are used to calculate current prices. When we consider the major out performance in the Nasdaq 100 Index, it would only make sense that if we see downside in the future we could capture some big potential profits.

    As an option trader who focuses primarily on probabilities for trade executions using a variety of implied volatility calculations and Delta assumptions, the following observations regarding the Nasdaq 100 Cash Index (NDX) were derived based on data points on Friday, August 29th.

    Based on the September NDX option expiration date, the current skew in the NDX option data is to the downside. In fact, as I am typing this NDX is trading around 4,075. A 2 standard deviation move to the upside (90%) is around the 4,200 call strike and the same measurement to the downside is around the 3,900 put strike.

    (click to enlarge)

    When looking at the same data based on the October NDX option expiration date, the current skew in the NDX option data demonstrates more aggressive downside Skew in October versus September. A 2 standard deviation move in the October series to the upside (90%) is around the 4,275 call strike and the same measurement to the downside is around the 3,755 put strike.

    (click to enlarge)

    While I realize this is somewhat technical, the main premise is that the option market in the Nasdaq 100 Cash Index (NDX) is skewed toward more potential downside risk. This data lead me to place a new trade earlier this week which was next short the Nasdaq 100 Cash Index (NDX) using an October Call Credit Spread as a trade structure.

    Recent results for the service have been very strong for the options alert service. The last 4 trades have produced a 13.95% winner in Matador Resources (NYSE:MTDR), a 17.05% winner in the S&P 500 Cash Index (SPX), a small 1% loss in the Nasdaq 100 (QQQ), and a 21.95% in the Russell 2000 Cash Index (RUT). The options newsletter service is priced super affordable at just $29.99 per month with new trade alerts sent out almost daily.

    Ultimately time will tell if the skew in the NDX proves to work. For now, I like the near 75% probability of success that the NDX Call Credit Spread is offering with a nearly 20% potential return. In the future readers can expect a recap of this trade. Happy Trading!

    Chris Vermeulen

    www.thetechnicaltraders.com/options/

    Tags: QQQ, DIA, SPY, IWM
    Sep 02 9:11 AM | Link | Comment!
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