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Robert Edwards
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Contrarian daytrading technician who specializes in locating high probability short term trades while predicting price movement directions with over 85% accuracy. Most of my trading involves either extremely short term micro scalping of stocks or commodities (using 1 minute bar charts), or swing... More
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  • Based On Seasonals, Now Is The Time To Get Long Natural Gas & UGAZ!

    (click to enlarge)

    The above seasonal chart of natural gas is courtesy of David Stendahl of Signal Trading Group, click here. The blue line shows the seasonal tendencies over the previous 5 years, the brown line is 10 years and the green line 15 years. What is apparent from the chart is that every year natural gas has a spring low in about April, as well as a lower low in the fall in September. From the September low, one can expect natural gas to begin rallying with a large spike hitting about the middle of October, as colder weather begins to appear on the radar screen.

    We can now look at the weekly chart going back a couple years as follows:

    At the left of the chart, the 4th week of October in 2012, was a down week. However, natural gas would rally over 50 cents higher in the next 4 weeks, to top just under $4.00. A year ago, in 2013, natural gas topped at $3.83 during the 3rd week of October, and then fell for 2 1/2 weeks, to strike a low 70 cents lower, at $3.13. From that low, natural gas would begin a rally that would take it to $6.493 by February 2014, thanks to an extremely cold winter.

    In 2014, the nearby natural gas futures contract topped at $4.184 the first week of October. Natural gas has now fallen back from that high. The current week is the 4th week of October, and one would anticipate a bottom in natural gas either this week, or during the next couple weeks. A similar drop of 70 cents from the recent high of $4.184 would project a bottom in natural gas around $3.484, which I have rounded off at $3.50. Today, October 21, 2014, the nearby November Natural Gas contract hit an 11th month low of $3.631, before rebounding to close up 4.1 cents at $3.711. The November Natural Gas Contract will stop trading in a few days. If natural gas bottoms with the November contract still trading, we will have fallen within 15 cents of our target low. If natural gas continues to fall for a couple more weeks and December Natural Gas is the nearby contract at the low, it closed today at $3.800 and is vulnerable to another 30 cent drop from here. On a full contract, every penny is $100 so a 30 cent drop if one bought December Natural Gas here, would involve holding a loss of $3,000.

    Although I successfully scalped Natural Gas from the long side today, the market has not yet shown a confirmation of a bottom. We can now look at a daily chart of December Natural Gas:

    The December Natural Gas contract held support at around $3.90 MMBtu for nearly 3 months, before giving way the last few days. Regardless of today's reversal, December Natural Gas may not bottom for good, without dropping a bit further down. My best guess is that $3.50 should be tremendous support based on previous trading action of previous years, but there is a very small outside chance that December Natural Gas falls to an extreme low of $3.12 to $3.35. To see what that translates to UGAZ, please consider the following daily chart:

    (click to enlarge)

    The triple leveraged Long Natural Gas ETN (NYSEARCA:UGAZ) closed today at $11.56. If December natural gas should fall another 30 cents (a drop of 7.9%), then UGAZ could fall 23.7% to $8.82. If December Natural Gas made an extreme bottom of $3.20, then UGAZ could fall to as low as $6.55.

    I have determined that odds favor a most likely low of $3.60 in December Natural Gas. If correct, UGAZ should trade no lower than $9.75. From a low of $3.60, natural gas should rally 40% with a mild winter, and 100% with another cold winter similar to last year. If $9.75 is the low in UGAZ, one could expect a bounce of 120% to 300% depending on the severity of the winter, projecting a winter high of $21.45 to $39.00. If Natural Gas bottoms at $3.50, UGAZ should bottom around $8.82, and rally to $19.40 to $35.38. But if Natural Gas bottoms at $3.20 and UGAZ falls to $6.55, then UGAZ should recover to between $14.41 to $26.20.

    For those nimble enough to buy on dips and partially sell on rallies, one can scale in buy at present levels. For those who are cautious and do not want to risk a great deal of capital, they can hold off buying UGAZ until it hits bottom and starts moving out of the hole. One could maybe buy on a stop at $12 or $12.50 after it has bottomed and started moving higher. In any case, natural gas is expected seasonally to bottom between now and the first or second week of November 2014. We won't have to wait long to see what happens as we prepare for what should be a very cold winter, click here.

    Disclaimer:

    The thoughts and opinions in this article, along with all stock talk posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.

    Oct 21 11:55 PM | Link | 8 Comments
  • The Dow Has Fallen 6 Days In A Row -- Should I Be Bullish?

    Basic Probability Theory

    Each day there is a (coin flip heads or tails), 50% chance the Dow Jones Industrial Average will close up, and 50% chance it will close down. Well, today the Dow has closed down for 6 days in a row, a very rare occurrence. To calculate the odds of such an event, just take 1 divided by 2 raised to the 6th power (1 / 2X2X2X2X2X2 chance) which is 1 chance in 64. To get another down day tomorrow to make seven down days in a row, the odds are 1 / 2^7 or (1 chance out of 128).

    It would seem logical that if the Dow trades down early tomorrow, I should buy stocks with the anticipation we will get an up close. However, each coin flip is independent with no memory of the previous flips. It is just as likely we close down for a 7th day tomorrow, as break the string by closing up. I can only lament the fact the Dow has come up tails 6 times and the chance of heads (an up day) tomorrow is still just 1 out of 2 (50%). Probability theory would dictate that I cannot base my future buy and sell decisions on the immediate past. The story should end there, right? Wrong!

    Research Shows That You Want To Buy After 3 to 7 Consecutive Down Days

    Larry Connors back in January 2007, wrote a very interesting article that you can find on the internet here. According to research performed by TradingMarkets, if you see where a stock is trading a week following 3 to 7 consecutive up days, the stock is usually down. The more consecutive up days, the more negative the returns one week out. This reversion to the mean logic makes a lot of sense.

    However, when it comes to buying a stock that has fallen for 6 consecutive days (like the Dow just did), one can expect for the stock to be trading 0.82% higher a week from now. If Friday is also a down day, making 7 down days in a row, then the one-week expected gain is 1.06%.

    It will be fun to watch and see how the Dow performs tomorrow to see if we indeed get 7 down days in a row, or we finally get that up close. In any case, I will be long the December Dow Futures contract (YMZ4) to take advantage of a short-term relief rally that should occur next week.

    The Crude Conundrum

    One thing that did occur today was November Crude Oil (CLX4) finally traded below $80 early in the day, but reversed hard to the upside, hitting $85 before falling back to close in the mid $82s. If $80 was taken out, everyone was sure crude oil was doomed to drop to $75, $60, or $40. It was almost assured then that we would go the opposite way when the dreaded $80 support level was breached. Art Cashin on CNBC mentioned on Wednesday that weak crude prices were depressing stock traders, spelling weak demand, and economic doom around the world. Shale oil plays which is supporting our economic growth, needs crude oil to trade above $80 to remain economically viable.

    The last couple days, traders were getting very short November Crude Oil when it traded just above $82, and making lots of money as Crude Oil fell back towards $80. As it came out of the hole today, I said to myself, I should put a buy stop just above $82.50 because if we should pop on up, the shorts who shorted between $82 and $82.50, would have to cover. I didn't trade it, but as predicted, when crude oil hit $82.50, it almost immediately exploded another $2.50 to the $85 level, before falling back to the mid $82s. Now, there will be a lot of support in Crude Oil around $82 as the big boys don't want to let any bears out of their short contracts at a profit, by falling back under $82. From the $82 launching pad, it will be fun to see how far Crude Oil can rally, which could help support the stock market. Weak Crude Oil prices have been blamed for the weakness seen in stocks, looking at decreasing world demand. The demand is unchanged but in fact it is the supply that is burdensome and knocking down prices. But right now traders are looking at weak crude prices as bearish for stocks, when in fact weak crude prices is bullish for stocks. For now, since it is working, I will forget normal logic and look at higher Crude prices as bullish for stocks and lower prices as bearish.

    As long as Crude Oil stays above $82, then I will be bullish stocks. But as soon as Crude Oil again breaks under $82, then it will be time to go short crude oil with $80 likely being taken out soon thereafter. That would also be the signal to abandon any long Dow Jones futures position as the correction is over and both Crude Oil and stocks are probably again heading lower.

    Disclaimer:

    The thoughts and opinions in this article, along with all stock talk posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.

    Tags: DIA
    Oct 16 7:17 PM | Link | 2 Comments
  • Time To Start Following The Triple Leveraged Stock Market ETFs: SPXL & TNA

    The Stock market is very oversold right now, on a short-term basis. They have pounded the markets relentlessly the last few days, thanks to Ebola and other fears. But that could soon change. Patti Domm on the CNBC website, just wrote an excellent article explaining how we might be close to a bottom, click here.

    Everyone keeps talking about whether or not the Dow and S&P will make a 10% correction, or if we can rally from here with only a 6 or 7% correction. We can take a look at both of these possibilities using triple leveraged ETFs. I googled "leveraged stock market ETFs and found this page here. I would probably not want to trade an ETF with the volume less than 1 million shares per day, and would stick with the large volume funds on this list. That means that the triple leveraged Dow Jones ETF (NYSEARCA:UDOW) should not be traded. Instead, if I was looking for large cap stock exposure, I would trade SPXL. For small cap exposure, TNA is the ticket. We can now take a look at both of these charts starting with the weekly chart of SPXL.

    (click to enlarge)

    The triple leveraged Direxion Bull S&P 500 ETF (NYSEARCA:SPXL) has been in a solid uptrend for the past three years, as shown on the weekly chart above. But recently SPXL has topped out at $83.59 and has fallen for the past 4 weeks. For the past 3 years, corrections have lasted about 4 to 6 weeks, so it is likely SPXL will bottom within the next couple weeks and head higher. This is only the third time that the correction has been severe enough to hit the 50 week moving average "blue" line on the chart. The last time this occurred was back in November 2012. If the S&P corrects 10%, then the SPXL could fall 30% from the recent high of $83.59, which would take us down to around $58.50. There is support at $60 from April 2014, shown on the chart. Thus it would appear that the bottom should occur within the next 10 to 12% drop from here. This might be a good time to begin buying SPXL on dips and selling out on rallies, with the intention to buy more aggressively if we approach the $60 level. We can now look at the weekly chart of the triple leveraged bull small cap fund (NYSEARCA:TNA):

    (click to enlarge)

    The small caps chart is not nearly as bullish looking as the SPXL. In this chart, one will see that we have broken far below the 50 week moving average and are shooting for the 200 week moving average below. The April/May 2014 support levels have been taken out long ago. Instead of bottoming after 4-6 weeks, the TNA tends to fall for 8 to 10 weeks before bottoming. We are now on the 7th week, and so far, we are slightly higher for the week after just two days. Support looks solid around $50 which was last seen in August/September of 2013. Because the TNA has already made lower highs and lower lows a couple times already, and appears to be in a downtrend, I prefer trading SPXL and will begin buying into SPXL on dips. I will end with a daily chart of SPXL:

    (click to enlarge)

    As we start trading today, we are starting out the day, down over 100 points in the Dow Jones Industrial average. If we don't recover today, the SPXL will suffer a five day down draft. It is rare for the SPXL or the Dow Jones Industrial Average to fall more than 4 or 5 days in a row without having a corrective rally. I would anticipate that by the end of this week, we will be trading higher than we are at present.

    Disclaimer:

    The thoughts and opinions in this article, along with all stock talk posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.

    Tags: SPXL, TNA
    Oct 15 8:12 AM | Link | 2 Comments
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