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Michael Kudrna
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"The market can remain irrational longer than you can remain solvent.” John Maynard Keynes In an industry which caters to the greedy and already wealthy, it has become increasingly complex for the individual investor to find a path to success. “Buy and hold” is an inadequate investing... More
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  • Fed News Just What The Bears Ordered?

    We saw one the most highly anticipated Fed meetings this year as the markets trended sideways leading into the result.  Some of the bulls were hopeful in receiving QE2 while the majority predicted nothing would change from the August meeting.  Sure enough, nothing did change.   The Fed still implied it will use QE2 to hold the markets up, if necessary.  However, it is not necessary at this point in time and the recent rally has priced in this news.


    Usually when news is predicted, nothing significant happens.  It is the news which is not predicted that makes the most impact.  With Fed meetings, it has become a trend that the first direction the markets move usually finds a reversal soon thereafter.  After the Fed announcement was finished, the markets trended higher only to see a final hour strong-volume sell-off that saw only the Dow Jones still finishing green.

    August 10th (circled on chart) was the last Fed meeting and at that point in time, we were near the trading highs of the year.  After the Fed meeting, the market saw a sell-off the next day and downtrended towards the lows of the year.  Will we see a similar setup?  It seems too easy to predict which always makes me leery but, the markets are desperate for a pullback to entice more bulls to jump in.

    The On Balance Volume (OBV) is starting to build a bearish divergence and the high volume selling in the final hour was concerning.  With the markets clearly overbought, this could be the bears finally standing their ground as we don’t have another Fed meeting until November.  While a low-volume pullback would be healthy for the charts, we don’t seem to have many healthy pullbacks this year.  Instead, we find ourselves going from uptrending to downtrending back to uptrending rather quickly.  I have a healthy short position hedged against my longs for this reason and am glad to hear Doug Kass has built his short position as well.  Doug Kass has been the most accurate analyst I’ve seen this year so, I tend to keep an eye out when he changes between long and short the market.


    If the bears can break the support levels around 1130 in the S&P 500, we can expect that to trigger stop-losses and give the bears some confidence.  Now that the bears don’t have to worry about QE2 right now, they may have more energy in fighting the bulls.  If the bears can break 1130, I’ll look to press my shorts in ProShares UltraShort S&P 500 (NYSEARCA:SDS) and ProShares UltraPro Short S&P 500 (NYSEARCA:SPXU)  and quickly book profits in my longs.  Since I made the successful Orexigen Therapeutics (NASDAQ:OREX) FDA trade my largest position (and sold per my exit strategy) last week, I have higher short exposure than longs at the moment.  Without a healthy pullback, it is increasingly harder chasing longs in this rally when you have discipline.


    As always, do your own homework to see if you agree.  Have a good night and I’ll see you in the morning.  Good luck out there.


    Disclosure: Long SDS and SPXU but positions may change at any time
    Sep 21 9:03 PM | Link | Comment!
  • Can News Trump Technical Analysis?

    The simple answer is yes and that is one major reason why I am not gambling on the news tomorrow.  Technical analysis helps identify trends to help guide investment decisions but, TA should never be the sole tool used in making those decisions.  Fundamentals play a role even though not much of a role in this year’s market.  News and market sentiment are playing an even more critical role this year.  The news combined with the market sentiment is creating significant volatility that we continue to see.  This is a very news-driven market and Friday should prove that to be true.


    Thursday was a solid follow-through day that the bulls were looking for.  We did not have solid volume but we broke resistance levels and trended higher into the close.  What was very shocking was how the bulls were willing to gamble so much by pushing higher into the close knowing the important news being released tomorrow morning.  It almost feels like some type of setup rather than a bullish move north that we can trust.  Bears don’t convert to bulls this quickly coming off one of the highest bearish sentiments since the reversal in March 2009.  Maybe somebody knows something we don’t though?


    While we are still in a trading range, per the monthly chart, we are now in the uptrending part of the range.  Under normal circumstances, I’d be an aggressive buyer today but tomorrow’s jobs data is not something to gamble on unless you already know the results.  We can expect very significant downside tomorrow if the numbers are worse than expected with moderate upside and many resistance levels.  With ADP employment numbers showing significant weakness, I would not be shocked to see Friday’s figures coming in weaker than expected.  Even if numbers come in slightly better than estimated, that’s not a good sign for the economy.  However, the markets should rally on any expected or better-than-expected news.  A rally would have the bulls testing the next resistance level of 1100 on the S&P 500.  I reduced some of my shorts today on the surprising bullish afternoon. Most any seasoned trader would have anticipated market players taking risk off the table and not gambling on tomorrow.  With such low volume, I can’t imagine it was short covering either.  The close was unique, to say the least.  Friday may shed more light on why we saw the close we did today.

    You can color me more bullish now but, I still refused to gamble on the news Friday.  We have no edge in knowing the news therefore that’s a losing trade.  As stated earlier, I reduced some of my shorts, particularly in ProShares UltraShort S&P 500 (NYSEARCA:SDS).  This ensures I stay equally hedged for tomorrow while sitting in high levels of cash and ready to move in either direction.  I did add a new long position that I am familiar with in Verizon (NYSE:VZ).  VZ announced today that it increased its quarterly dividend by 2.6% to $.4875 per share and I couldn’t pass that up.  We can also expect to see more rumors of Apples (NASDAQ:AAPL) iPhone coming to VZ so we may see some minor boosts to the stock from the rumors and an even bigger boost if the rumors turn out to be true.


    After tomorrow’s news is released, I’ll look to be more active again.  We should see more clarity in the direction we are going and I’ll look to deploy more cash at that point in time.  The markets tend to react more volatile to news that is unexpected rather than what is expected and already priced in.  Time will tell if the jobs are bad or very bad.  We have priced in the bad as the estimates are not good but, we have not priced in the very bad.  If tomorrow’s reports confirm what we saw in the ADP employment numbers, I expect an ugly day. If not, let’s hope for a solid follow-through to finish the week and confirm the uptrend before the holiday weekend.

    As always, do your own homework to see if you agree.  Have a good night and I’ll see you in the morning.  Good luck out there.


    At the time of publication, Kudrna was Long SDS and VZ but positions may change at any time.

    Disclosure: Long SDS and VZ but positions may change at any time
    Tags: AAPL, SDS, VZ
    Sep 02 11:55 PM | Link | Comment!
  • Bearish Harami Formation a Sign of Market Downside?

    After a strong showing Friday by the bulls and the chance to show us Monday that they are finally here to stay, the bulls instead chose to cower in the corner.   Today was a very light volume day that some say is technically good because it’s a low volume pullback.  Many times that analysis is correct.  However, today formed a bearish harami in the S&P 500 which means tomorrow could get very ugly.  It could be argued that the bearish harami was not truly formed because the trading range wasn’t tight enough but, if it wasn’t for the last few minutes of the market sell-off today, the formation was very clear on the chart.  I made the mistake of identifying this formation too late and was not able to build upon my shorts prior to the close.  When we have such boring low volume days in the market, it takes strong discipline to focus and today I made that mistake of not focusing enough.

    It appears we are about to test support around 1040 once again and if we break below that, we are just down the street from the lows of the year.  Doug Kass believes we are in a trading range but I’m still fearful of a major market sell-off like 2008.  While I fully expect some bounces, I will likely use those opportunities to sell some long positions and go further short the market.  We still have some hot sectors such as utilities and agriculture for the bulls, so I may play some longs there if they continue to show strength.  The area I’ll really be paying close attention to is energy though.  If energy rises due to the hurricanes, the market is likely to ignore technical analysis and rise with it.  If energy prices are not going to rise due to the hurricane, I see little reason to believe the bulls can win.


    If we have a green day tomorrow, the bearish harami will not be confirmed therefore, we can disregard it for the time being.  If it is confirmed, I will look to quickly and aggressively add to my ProShares UltraShort S&P 500 (NYSEARCA:SDS) position as a hedge against my long positions.


    On the long side, I added to NVIDIA Corp (NASDAQ:NVDA) on a pullback today due to a downgrade that I believe is not warranted and already priced into the stock.  NVDA may not have significant upside until the markets turn more bullish but the downside risk should be minimal.  However, if the markets downtrend, that downgrade will appear to hold much weight and with my bearish perspective in the market now, I would have preferred to wait to add to NVDA.

    I also started a position in U.S. Natural Gas (NYSEARCA:UNG) as a natural gas long.  With the hurricane, natural gas prices should see some upside.  Also, last year around this time, natural gas went on a rally that saw UNG double in about a month.  However, after some more research, I quickly sold my UNG position today in favor of First Trust ISE-Revere Natural Gas ETF (NYSEARCA:FCG).  UNG is under some regulatory pressures so FCG looks to be a safer play for natural gas.

    If I wasn’t so concerned for the bulls in the short-term, I’d really like to have large positions in Orient Paper (NYSEMKT:ONP) and Orexigen Therapeutics (NASDAQ:OREX).  I believe they have significant upside potential in their respective situations.  Since the markets seem to lack support though, the downtrending market could very easily drag these stocks to unforeseen levels so my positions will stay small or be stopped out entirely.  My style of investing makes me more focused on protecting capital in this type of market than trying to make significant gains by gambling too much.  The downside risk is very real and I will not be caught arguing with the illogical beast known as the stock market.

    As always, do your own homework to see if you agree.  Have a good night and I’ll see you in the morning.  Good luck out there.


    Disclosure: Long OREX, NVDA, SDS, ONP, and FCG but positions may change at any time
    Aug 30 7:08 PM | Link | Comment!
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