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Leg into 2011!

Jan. 03, 2011 9:06 PM ETSPY, USO
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Seeking Alpha Analyst Since 2009

I work on the institutional trading desk at NorthPoint Trading ConvergEx. It's a multi-product desk that caters to long / short hedge funds and alternative mutual funds. We clear through Goldman Sachs, JP Morgan, Pershing and have access to worldwide markets. Additionally, we leverage ConvergEx algorithmic trading for high quality executions. Our main focus at NorthPoint Trading ConvergEx is to take developing or newly launched funds and give them an opportunity to succeed. We provide access and the 'know how' to take seed capital and give it every opportunity to yeild strong results. Moreover, I am a Chartered Market Technician and a member of the Market Technicians Association.

Ah yes... what a great way to begin the New Year!  Well, I should say it's great if you're long equities and commodities, and melancholy if you're short.  To begin 2011, the major US averages reached multi-year highs.  After a week or so of consolidation for SPY, it's clear that investors are looking for reasons to buy this market.  From a technical perspective, you can't help but love the chart below!  Anytime you can see an orderly move up from the bottom left to the top right, it shows undeniable mementum and strength.   

Internally, there are other undeniably bullish indicators just within this simple chart.  One is that the 50 day simple moving average is clearly acting as support.  In late November 2010, SPY tested this average, and it showed renewed strength.  It's obvious that long equity positions should be maintained until the 50 day SMA is broken.  Right now, clear support is at 121.45. 

Next turn your attention to RSI.  Currently, SPY is approaching 80, which is close to overbought.  A quick look back shows the last time this major average reached 80, it was followed by 2 to 3 week sell off.  However, keep in mind the famous trader's addage, 'The trend is your friend until the end when it bends.'  A smart strategy here is to maintain longs on equities with a stop below the 50 day SMA support level.  January 2011 could find turbulence, but nothing from a technical perspective shows weakness. 

Now to support to namesake of this website, how do you 'seek alpha' in this market?  Here's my opinion: unless you live under a rock, you've probably noticed that gasoline prices are creeping up to uncomfortable levels.  Why not hedge this extra expense by getting some exposure to oil?  If you observe the chart below, you will see oil is continuing to make higher highs and higher lows.  It shows that the 50 day SMA supported it in November 2010, and that it is also making new multi-year highs. 

On a medium term basis (for me this is 2 months to 1 year,) I expect oil to outperform SPY.  It has been in consolidation for too long and is poised for a breakout.  Also, notice that the bullish engulfing pattern from 12.31.10 showed really solid support around 89 which gives me more confidence to be long here.  To take advantage, I bought the USO Feb 2011 35/40 bull call spread.  To be fair, I actually placed this trade several weeks ago and it's worked out well!  This position gives me time to be right by buying an in the money call and selling an out of the money call to hedge the theta or time decay of the option.  If oil continues its path to 100, which I think is the obvious next stop, this position should yeild a nice percent return.  Fair warning: be cautious with oil closing below 90 though.  A close below 90, will give me strong consideration to close out this trade.

Happy trading!

Disclosure: I am long USO.

Additional disclosure: I am also currently short the Euro/USD pair.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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