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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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  • Short Term, There's One, Small Cap, Chink In The Market's Armor

    By all means, on a longer term basis, the American market looks fantastic. However, in the past week, the risk of entering new into new long positions via ETFs (not single stocks) appears high. Why? Small cap stocks have been losing ground over the past few days, unlike the "major" indices. These "major" indices that investors generally look at are the Dow Industrials, S & P 500, and the NASDAQ Composite. The Dow and S & P 500 give a view of how the 530 largest companies' stocks are performing, ignoring the performance of smaller companies. The NASDAQ Composite, while comprised of around 3000 stocks, is essentially also a large cap index. To get a better understanding of why this is so, take a look at the index's top ten weightings.

    AAPL - 20.21%

    MSFT - 8.06%

    GOOG - 5.75%

    ORCL - 5.06%

    INTC - 3.62%

    AMZN - 3.59%

    QCOM - 3.44%

    CSCO - 3.14%

    CMCSA - 2.25%

    EBAY - 1.99%

    So, ten out of 3000 companies in the index represent about 57.12% of the index's movement. Even more surprising, the top 50 companies in the index are responsible for around 85.33% of its movement. Therefore, the smaller companies beyond the first few hundred in the index do not really affect it much. The NASDAQ is a large cap index.

    When monitoring the performance of smaller companies, my index of choice is the Russell 2000 ($RUT). Year to date, the Russell 2000 has performed exceptionally well, outperforming all of the large cap indices. See the chart below for a comparison of the Dow (black), S & P 500 (blue), NASDAQ Comp. (green), and the Russell 2000 (brown) since January 1.

    (click to enlarge)

    While it is typical to see small and mid cap stocks outperform their large cap peers in a bull market, these stocks are also the most sensitive to when the market mentality turns to "risk-off." Very often, small cap indices like the Russell 2000 start to underperform before short term tops and corrections. In addition, small cap stocks often enter bear market territory long before large caps during major market tops. As you can conclude from the chart above, with small cap stocks still dominant, the probabilities do not favor that a major market top will occur in the near future.

    So, while the Russell 2000 is an outperformer in the longer term, its short term performance tells a different story, which is why I'm not quite convinced that this current correction/sideways correction has concluded yet. Take a look.

    (click to enlarge)

    This chart shows that, while the roughly 630 largest stocks in America have trended sideways over the past week, in aggregate, 2000 smaller ones have moved lower, in aggregate. This short term weakness could spread to larger cap issues, which could cause the market to drift lower in the short term. I do expect a breakout to occur eventually, which should place the Russell back into its leadership role, but until then, investors should be aware of the potential for a further pullback.

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

    Mar 23 4:37 PM | Link | Comment!
  • Large Base On Heavily Shorted Basic Energy Services (BAS) - 60% Pop Incoming? (Video)

    Bill O' Neil, founder of Investor's Business Daily, always had a special fondness for big basing patterns on stocks. He constantly looked for "cup and handle patterns." That is, when a stock, which was dormant for a long period of time, makes a rounded bottom (the cup) before breaking out. This breakout is often met with increased selling, which sends the stock back down for a brief period (handle). Then, a surge of buyers enthusiastically rush in, which makes the dormant stock suddenly burst upward. This is exactly what I'm seeing in Basic Energy Service's stock.

    (click to enlarge)

    In addition to the bullish base and breakout in the stock, the sentiment on the stock is decisively bearish. This suggests that, if the stock begins to rise, a short squeeze could accelerate the climb many fold. For the full video analysis of the stock, click here. Make sure to view in 720p for best viewing experience!

    Mar 17 8:12 PM | Link | Comment!
  • You Might Want To Buy Gas This Week – And Stop Using Oil To Forecast Gasoline!

    A Sigh Of Relief, To End Shortly

    The last month has provided a slight relief to the consumer, as the average price of gas declined over thirty cents per gallon since the Valentine's Day short term top. Of course, $3.65/gallon is hardly a relief, especially when compared against gas prices a decade earlier, but that's besides the point. The point is that, given current conditions, it appears that gas prices are about to make another thrust upward, and perhaps to new record highs, in the coming months.

    Higher Oil Means Higher Gas, Right?

    It's very intuitive, since crude oil is a major input in unleaded gasoline. However, it is only one of hundreds of the ingredients that go in the gas tank with each fill. Even so, the price of gasoline should follow the price of oil, right? Sort of.

    A quick comparison of the ETF (NYSEARCA:USO), which tracks the daily percentage change of crude oil futures, and (NYSEARCA:UGA), which tracks the daily percentage change of unleaded gasoline futures, shows that the relationships that the price relationships that most would consider obvious are quite weak. For instance, the correlation between the two ETFs is 41%, which is only moderately statistically significant. Another relationship measurement, beta, shows that for every $1 crude oil goes up, gasoline only rises $0.69, but UGA is just under its 2008 highs, while USO is more than 40% off of its 2008 high.

    For that reason, I suggest for most to use UGA to forecast gas price rises and falls instead of USO. For those who have access to futures charts, use the actual spot price charts of gasoline. In this post, I will be commenting on UGA.

    Underlying Strength

    The failure of a stock or commodity to become fully oversold represents strength in the underlying. Since November, gasoline has done just that. On the opposite side of that coin, if a stock or commodity becomes fully overbought, it shows strength in the underlying trend, and suggests that any existing uptrend is strong. In January and February, gas UGA became extremely overbought.

    In addition, gasoline's decline was halted right at a key support zone before climbing three percent on Friday. The level that gasoline bounced off of was the 38.2% retracement of the entire rally since November, and also the 61.8% retracement of the smaller rally that began in mid-January. Such a strong support zone is expected to hold. If it does not, a proportional target to the downside would sit near $58.00, about 8.5% below the current price.

    (click to enlarge)

    The Buy Signal

    Price, in fact, gave the trader's buy signal on oil. The decline from Valentine's Day could be described as the consolidation period from a "flag pattern." The pattern is easiest to see on the 60-day chart. The $70 target corresponds to roughly a 10% advance from current levels, or gas prices around $4.05/gallon.

    (click to enlarge)

    Given that the volume was weak on the breakout, I would take a half position on this breakout, and then after a pullback, if one occurs, enter the other half of the position. My stop would be around $60, but the probability of that occurring appears low.

    For those who would rather not dabble in the commodity world and buy gasoline futures/ETFs, look back to the title. How about you just buy gas for your car today? Happy trading!

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

    Mar 10 4:16 PM | Link | Comment!
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