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Option Millionaires was started in February 2008 to provide traders with information about option trading. Led by three career option traders, whose pseudonyms are JimmyBob, UraniumPintoBeans, and Vantillian, they started one of the most popular option trading communities on the web. Now, Option... More
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  • The First Move Is Often False – Beware Of News Driven Rallies!

    The Fed should really consider looking at a momentum oscillator some time. It seems that the market reaction after the Fed makes announcements is largely dependent on the short term overbought/oversold condition of the market.

    To elaborate, at the September 2012 Jackson Hole meeting, the FOMC on May 22nd of this year, and the most recent FOMC release on September 18th, the Fed made announcements that should have boosted the market, but instead they each occurred at, or near, short term tops (NYSEARCA:SPY). Why? They made these announcements when the market was already severely overbought. See the chart of the DJIA (NYSEARCA:DIA) below for examples.

    (click to enlarge)

    Before delving into this, I will never say that buying an overbought market is a bad strategy. In fact, some of the lowest risk short term opportunities come from overbought markets (TSLA?). However, to understand why these short term tops occurred, we need to take a look at the dynamic between supply and demand during these news driven moves.

    After an extended short term decline, most of the sellers (in the short term) have had already sold. Conversely, after an extended rally, most of the buyers have already bought. So, when there is a positive news event after an extended rally, demand is most likely already exhausted, so prices cannot go much higher. Everybody welcomes the bullish news, but does not buy, since they have already bought. You get the super high volume on one or multiple days with little price movement as previous buyers sell into the any rally that develops. That is characteristic of an exhaustion move.

    On September 18th, when the Fed announced their would be no taper, NYSE total volume skyrocketed over 70% above its 50-day average, giving the day the ominous appearance of an exhaustion rally. After follow-through was weak on the next day and a powerful, high-volume selloff ensued on the day after that, we mostly have a short term top in place.

    In conclusion, exceptionally high-volume, news driven rallies, like we saw on September 18th and May 22nd, should be regarded with caution. This is especially true when these rallies have little signs of continued strong buying in the days after. I will most likely be shorting the weakest sector ETFs (currently XLE and XLU) on a test of the Sept. 18th high, if it occurs, with a very tight stop in case I am wrong.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Sep 22 7:09 PM | Link | Comment!
  • Gold Mining Stocks Making New Highs Despite Market Weakness – Keep Pyramiding!

    (NYSEARCA:GDXJ), the junior gold miners ETF fund by Market Vectors, was up another 5.43% on Friday, putting the ETF at its highest level since April. Into the recent correction, I had my eyes on this ETF, as it continued to rise, despite weakness in the broad market. Since the market rebounded off its August 21th low, gold stocks have gained further positive momentum.

    Now, what I can see in the major gold mining ETFs appears to be the completion of at least an intermediate term bottom. Currently, my target on GDXJ is $70, which is just under 40% above its most recent close. That still suggests that the amount of risk relative to potential reward in this trade is favorable. To see the analysis of this gold ETF and strategies you can implement to profit from a continued rise, click here! Remember to make sure to watch the video at the highest resolution option!

    Aug 25 5:26 PM | Link | Comment!
  • Sector/Segment Check – Where To Find Opportunities Now

    On a much needed elaboration of the stock market idiom, "a rising tide lifts all boats," let's talk about how to pinpoint where the best chances for profits are in the overall market. Which sector stocks will be more likely to rise? Will a large cap stock likely outperform a small cap stock? Just keep thinking about that phrase, "a rising tide lifts all boats" as you read the question below.

    If you were to invest in a single stock, equipped with no information about that stock but its market segment (shown below), which stock would be more likely to climb?

    • Option A: Gold miners
    • Option B: Biotech

    The answer to this can easily be found in the charts of the groups. Would investing in a single gold mining stock be a profitable strategy right now? It could, but you will find yourself swimming against a tide of bearishness. Here's (NYSEARCA:GDX), the gold miners ETF. Investing in any gold mining stock will likely be akin to trying to catch a falling knife. There could be opportunities, sure, but why take the risk?

    (click to enlarge)

    Then there are biotech stocks. Take a look at (NASDAQ:IBB), which tracks the NASDAQ Biotech Index, over the last two years.

    (click to enlarge)

    So, the rising tide among NASDAQ biotech stocks could certainly lift all boats, including the boat (stock) you are planning on trading. This principle can be applied to long and short term trades. A stock in a clear uptrend is more likely to react positively to earnings announcements while one in a downtrend is more likely to react negatively to an earnings release.

    One can also accomplish this type of analysis with relative strength charts. For instance, I know that the S & P 500 is in an uptrend; so is the Russell 2000 Small Cap Index. Which index is doing better? If I invest in a stock in the index that is performing better, my probability of having greater profits is likely higher.

    So which index is doing better? In this case, a rising line means that the Russell 2000 (NYSEARCA:IWM) is outperforming the S & P 500, and a falling line means that the S & P 500 (NYSEARCA:SPY) is outperforming.

    (click to enlarge)

    Simply put, don't bother buying into a clear downtrend. You may have the skill to catch that falling knife and make a substantial profit a few times, but eventually, most everybody who fights the trend will lose a finger (or their house if over-leveraged!). In short, here is where it appears easiest to find profitable trades for me, based on this methodology.

    • Small cap stocks
    • Biotech stocks
    • Insurance stocks
    • Technology stocks, ex large cap
    • Financial stocks, especially regional banks
    • Healthcare stocks
    • Maybe telecom stocks

    Try it. You won't believe how much easier it is to make profitable trades. Good luck!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jul 28 4:37 PM | Link | Comment!
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