Seeking Alpha

Jeff Yaede's  Instablog

Jeff Yaede
Send Message
I'm just your average trader. Been entrusted with trading several accounts that I manage on a day to day basis. Been trading for 13 years and am a bit of a trading junky.
My blog:
TraderMinute
View Jeff Yaede's Instablogs on:
  • Bearish Engulfings - Trades On GDX, CAT, YUM

    The Bearish engulfing is a candlestick pattern that occurs when a bullish candle is immediately followed by a bearish candle that completely "engulfs" it. These candle patterns are very nice for short term traders as they typically signal a 2-3 day pullback in a stock. This pullback can be taken advantage of with an easy stop to control risk.(click to enlarge)

    The image to the right illustrates the look of a bearish engulfing. Note the bullish nature of the stock before the bearish engulfing candle. The bearish candle is then represented by a morning gap higher followed by selling throughout the day. The stock eventually closes below the previous day's low.

    The bearish engulfing price action is typically followed by a pullback in the stock. The severity of the pullback varies from stock to stock but traders normally can capture 2-3 days worth of gains on short or put option position. In some cases driven by fundamental news events like earnings, a bearish engulfing can signal a much more significant top and the beginning of a new longer term downtrend.

    Yesterday, the market opened a bit higher in the morning and closed slightly lower. This action helped to create bearish engulfings patterns in many stocks. In fact, 26 stocks in the S&P 500 exhibited these characteristics. While bears can use this action to establish downside positions, bulls can also use the price action to reevaluate their gains and look to take profits.

    The trade on a bearish engulfing offers a very easy stopping point that can be used to control risk. If the stock closes above the engulfing day's high, the trade is compromised and it is time to exit the short or put option position. Typically this type of stop represents relatively small risk compared to the potential gains achieved on a 2-3 day pullback.

    There are 3 engulfing plays that I find interesting in the market today. All 3 can be played with stops on the engulfing candle's day high. The gold miners etf (NYSEARCA:GDX) may be my favorite as it goes along with my bearish gold thesis. Caterpillar (NYSE:CAT) and Yum Brands (NYSE:YUM) represent stocks that have underperformed the market and are more likely to pullback severely if the market falls. Below are the 3 charts. Note that of the 3 stocks, there was only one bearish engulfing that did not work. (click to enlarge) (click to enlarge) CAT had an engulfing on the last day of June that was followed by a rally. One sign that the engulfing was suspect was the gap up 2 days prior. A strong gap especially in a stock on a downtrend can signal that the engulfing may just be a bullish trap. Currently, all three stocks show nice bearish engulfing patterns after a 1 month rally and can be played lower with a stop on the engulfing high. (click to enlarge)

    Tags: CAT, YUM, GDX, gold
    Aug 15 11:27 AM | Link | Comment!
  • 3 Reasons Copper Goes Lower - A Bearish Trade

    As China's economy begins to cool from blistering 10%-12% annual growth rates down to 6%-8% growth rates, commodities have lagged the broader market. Last week, I took a look at the bearish nature of the gold market based on a technical thesis with a rising US dollar. Today, I effort to pose an investment thesis for copper over the coming 3-4 months.

    Copper is typically deemed as the only commodity to have a degree in economics because it historically has been the best indicator of future economic growth around the world. For this reason, those who are bearish on the global economy as a whole can use copper as an investment vehicle. Copper has shown little long term effect from quantitative easing from central banks around the world. Where stocks can rise in the face of economic turmoil due to outside stimulus, copper is more likely to accurately reflect the state of the global economy. Below are my top 3 reasons why copper is set to go lower over the coming month.

    Reason #1: One of the most solid bearish arguments for copper can be made on the thesis that China's economy is cooling as is not likely to see the 10%-12% annual growth numbers again. Donald Straszheim, Senior Managing Director of China Research with ISI Group, said, "The boom days (in China) are almost certainly over. I think China's growth rate is slowing and slowing a lot. And the old era of 10 percent growth is going to become the new era of 6 percent growth. So the world is going to begin to absorb the idea that there's going to be weaker demand for a lot of these commodities for a long time to come."

    Mr Straszheim's argument is very fundamental in nature but is echoed from many around the world. Below are some of comments being made collected by Andrew Gordon in his article, 'Can you handle the truth about China'.

    • Average Chinese GDP growth this decade will not exceed 3% (Peking University Economics professor Michael Pettis)
    • "A one-in-three probability" that China will experience a hard economic landing before the end of 2014. (Nomura, the Japanese financial services firm)
    • "Some argue that China might already be in recession…" (Foreign Policy magazine article called "Five Signs of the Chinese Economic Apocalypse")
    • A "ghost fleet" of Chinese shippers plying the open waters in search of freight to transport, as if "out of the shadows." (Evan Osnos, The New Yorker)
    • China headed for a "hard landing of epic proportions." (Jim Chanos, hedge fund manager)
    • "China has all the earmarks of a classic mania that will end badly…" (Edward Chancellor from GMO)
    • "Huge downward pressure" from slowing consumer demand in Europe and real estate speculation at home. (Prime Minister Wen Jiabao)

    While China's economy may or may not be headed for an epic crash, the days of supersonic growth are behind it. A major growth engine for the price of copper is drying up.

    Reason #2: Long-term charts for copper are looking very suspect to further decline. The 1st chart below is a chart of JJC, the copper etn. Since the reflation of the markets in 2009, copper has failed to achieve gains. While bobbing up and down, the pattern is very clear. Most market technicians refer to it as a head a shoulders reversal pattern. A head and shoulders pattern is an rather accurate pattern seen ahead of a major reversal. The present head and shoulders pattern has not yet confirmed a breakdown, but another 1%-2% decline would break major support levels and signal a 12%-15% further decline in the coming months. The longer term implications of the pattern put the JJC below 30. (click to enlarge) While the head and shoulders pattern is considered by many to be a voodoo like interpretation of a chart, an ABC correction pattern is more accepted in technical circles. An ABC corrective pattern typically happens after a long term rally. The 'A' part of the move is the initial selling or profit taking seen in the 1st half of 2011. The 'B' move is where buyers step back in as they feel the stock or commodity is oversold as seen in the latter half of 2011. At present, copper is in the midst of a 'C' move. The 'C' move can be the longest, most drawn out move that typically retraces the long term rally by 62%. If copper keeps with its present ABC corrective pattern, the price target is around $35, similar to the head and shoulders target seen above. (click to enlarge) Reason #3: The US dollar and Copper are negatively correlated. A negative correlation suggests that when one thing rises, another falls. This is the case with the US dollar and copper. Historically, when the dollar rises copper falls and vice verse. There are many technical signs suggesting a rising dollar which naturally suggests falling copper. In the chart below, the negative correlation is evident but with 3 key exceptions. All 3 exceptions revolve around quantitative easing programs by the US Fed. When the easing programs were put into play, the correlation between copper and the dollar became very little but when the programs effects wore off the negative correlation returned. Given the presidential election in the US is only a few months away, I doubt the US fed is going to enact anymore QE programs for fear of being deemed as influencing the elections. (more to come on this topic) (click to enlarge) The Trade: Given the bearish arguments for copper, what is the trade? There are several options.

    1. Buy the 2x inverse etf for copper, SCPR. It will rise as copper falls at approximately twice the rate.
    2. Buy put options on JJC. The spreads on these puts are large so I would suggest deep in the money puts at limit prices where the spread is reduced. For example, the DEC 12 60 puts for $17-$17.50.
    3. Put options on copper miners. These can be a bit more tricky in a rising stock market but pay off big if stocks and copper fall together. FCX and SCCO are solid candidates.

    Technical confirmation of a downside trade is had with a move below $41.50 on the JJC. The bearish technical thesis on copper is severely compromised if copper moves above $3.55 or $45.5 on the JJC. These levels can be used as stopping points to minimize risk. With 12-15% reward potential on the downside and 4-5% risk, the 3:1 reward to risk ratio makes for a solid trade. (click to enlarge)

    Tags: JJC, copper
    Aug 13 5:18 PM | Link | Comment!
  • Dow Theory Fails To Confirm

    As a trader one of the 1st things to learn is that the market is always right. Many times one can get caught up in the arguments that the market is wrong or that the market isn't taking into account certain facts. Normally, this type of talk leads to trading disasters. For technical traders, the question of whether a trend is sustainable becomes a big one. Right now the market continues to see very little selling making the question...buy here and go higher or sell here to go lower? One of the tools I often use to help me with this question is Dow theory. Dow theory is one of the oldest market theories and has many interpretations and nuances. I like to use the theory for trend confirmation. If there is no Dow theory confirmation on a move in the market I stay skeptical and trade lightly. When Dow theory confirms a market move, I have a bit more leeway to get aggressive. Confirmation comes from the movement in industrial ($INDU) and transport stocks ($TRAN). When both sectors hit new highs, a bullish rally is confirmed. When industrials and transport sectors hit new lows, a bearish decline is on. While Charles Dow did not mean for his theory to be used in short term trading, its principles can help to understand the strength of a rally or decline. (click to enlarge) (click to enlarge) In June, both transports and industrials hit new short term highs after bottoming. Both continued to rally but notice how the industrials continue to make higher highs while the transports do not. The lower highs on the transports are an early warning sign to traders that the rally may not be as sustainable as many might perceive. While the lack of confirmation is in no way a sign of going lower, it signals to a trader like me that it is time to tread lightly. I suspect a confirmation or breakdown will happen as the month draws to a close and more volume begins to enter the market.

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

    Tags: DIA, dow theory
    Aug 10 2:11 PM | Link | Comment!
Full index of posts »
Latest Followers
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.