SPY Bearish Options Play

I entered a bearish vertical option spread today (it's a DEC 2016 211/203 SPY put spread). I'm betting that the SPY will close below 203 by 12/16/2016. If it does, I gain a max profit of $630/contract with a risk of $170/contract, for a risk:reward ratio of 3.7.

So what makes me think this is likely? Let's start with the big picture.

The chart above shows the 10 year monthly chart for SPY. Note that the Elliot Wave pattern indicates that a 5th wave could be close to complete. MACD divergence is clear, and the biggest volume months in the past year or so have been down-volume. All these signs tell me that the market is reaching exhaustion point.

From another perspective we can see that Dow Jones Industrials have been out-performing Dow Jones Transports. The two indices haven't confirmed each other and this is a bearish sign according to Dow Theory.

Finally, zooming in to the SPY daily chart, you can see that price is tracing out a pretty clear ending diagonal pattern. I love this pattern because it usually resolves in sharp counter-trend moves that often retrace the entire height of the diagonal. A one or two month move down to 1800 would not be out of the question, hence my reasoning for buying a bearish Dec, 2016 SPY put spread.

I plan to hold until expiration but I would sell early if we got a drop to 1800 at any point before then.

Exited USD/CAD

This is a late follow-up post to my previous trade entry. I exited USD/CAD around 1.3140 for 600 pips profit. I noticed price action stalling right below 1.32 and exited slightly earlier than expected. While the past two days of price action indicate that it could continue higher from here, I am happy to close my trade for a good profit and move on.

Notice how we got a strong blast off after breaking out of the ending diagonal -- one of my favorite patterns.

Trying USD/CAD long once again

I was stopped out of my last attempt at going long USD/CAD. Price has dropped another 700 pips since then, reaching another level of support so I'm giving it another shot.

Entry: 1.2550
Target: 1.32
Stop loss: two daily closes below 1.2450

On the daily chart below, note that price is sitting on another confluence of good support. I'll exit on two daily closes below the lowest trendline.

Zooming in to the chart above, you can see a clear 5-wave decline. This indicates that the larger trend is down, and after a brief rally, there could be continuation to the downside. However, note that wave 5 is an ending diagonal. This tells me we'll see an explosive rally soon.

The case for a gold rally

Gold is looking bullish.

The chart above is 10yr chart with monthly candles. Note that price is sitting on strong support – an ascending trendline and a previous high. Also notice that volume has tapered off substantially in the past 1-2 years, a good sign indicating that selling pressure is waning.

The next chart, a 5yr weekly chart, shows that gold is completing wave-5 of an ending diagonal. Historically, these patterns are terminal and are followed by an explosive move in the opposite direction. Wave-3 of the ending diagonal should never be the shortest wave; thus Wave-5 should go no further than 1050, or else the pattern is invalid.

  Finally, note that commercial traders are more net-long now than at any point in the past 10 years!

Combining all the evidence above with the bullish seasonality factor of August, I feel comfortable buying gold at these levels with a stop below 1050.

Final thrust?

AAPL appears to be tracing out a final ending diagonal to end it’s rally from $580. Look for a very sharp decline in the next week, leading to a test of at least $570 in the next couple weeks.

Volume divergence on SPY

It’s been a while since the last bearish post on the stock market. Clearly it has been wrong to be bearish, and I’ve paid for it. The market marches steadily higher, but it is currently displaying some signs of internal weakness that tell me it may initiate a choppy, medium-term downtrend soon.

First notice in the chart above that the market has carved out a nice 3-wave rally since the March 2009 low. Each subwave (A and C) has formed in 5-waves. Wave-5 of Wave-C appears to be some sort of ending diagonal. What is more interesting, however, is that on-balance volume has been trending lower even as price rallies, which indicates that this market is living on borrowed time. Look out below!

USD/CHF still bullish?

In October, 2010, we went long USD/CHF. Today, it’s a couple hundred pips lower, but it hasn’t proven that it wants to go substantially lower. In fact, one interpretation of the price action indicates that it is ripe to rise much higher in the coming months!

In the chart above, first notice that price has been supported by a very strong 16-year trendline. Also notice that the sideways action since October, 2010 appears to be an ending diagonal in which each of the subwaves breaks down into 3-waves. There is MACD divergence, and today price broke back up into it’s previous range. if price can manage to stay above .92, We’ll be happy to continue holding this position long.

Out of SLV put

I was short SLV via a Jan put, and today I closed it out for a profit. Because it’s expiring in 7 days, I didn’t want to hold and risk a rally in Silver prices. However, it was a hard decision because of the fact that gold just broke down from an ending diagonal, and when that happens, prices can drop very quickly. Either way, it was a nice trade!

On the Razor’s Edge

As you may know, I’ve been bearish precious metals for some time. Recently, I shorted silver as it spiked to $29/oz, and took a quick profit. I mentioned that silver could make further new highs, but any additional upside was to be shorted. I maintain that stance, and believe that metals are hanging on the edge.

First take a look at the Gold chart above. For the past 2 years, gold has been a perfect, no-lose investment, capping a 10-year streak of straight gains. However, if you look carefully at the wave structure, it’s apparent that the uptrend is nearly complete, and signs of exhaustion are showing. Gold is still making new highs, but recently it has been carving out an Ending Diagonal, which will reverse violently. I expect one more test to 1430-1445 before a trend change.

Another factor that makes me believe metals will soon drop substantially is the fact that silver recently consolidated in a triangle (see chart above), and has now broken out to the upside. Triangles often precede the final thrust in an uptrend before the trend reverses (you can see many examples of this phenomenon that I have highlighted on this blog). Furthermore, volume has been down-trending as silver makes new highs, and MACD divergence is ominous. If silver reaches $31.66, I will be buying a Put for a sharp decline.

If you believe that metals are a one-way train because they are  “real money”, and because the Fed is printing trillions of dollars, consider this: money is backed by debt, so the money supply can only multiply and expand if people borrow the money that the fed is supplying to the system. Out of the three major sources of borrowing (government, consumers, businesses), two are slowing down, or will be forced to slow down in the near future. No new debt = slow money supply growth = slow inflation. Food for thought.

Trading in EUR/CHF for USD/CHF

Today we arrived at two conclusions: 1) EUR/USD looks bearish. 2) we still like EUR/CHF bullish as discussed a few weeks ago. Thus, we wanted to trade both currency pairs. Of course, we quickly realized that EUR/USD short and EUR/CHF long is the same as trading USD/CHF long. So we did some analysis, and we’re now quite confident in trading USD/CHF long. We’ve switched our EUR/CHF long position to USD/CHF long position.

The chart above (EUR/CHF daily chart) identifies why we were happy to switch out of EUR/CHF long. Notice that the pair bounced of 1.28 as expected, with nice MACD divergence. However, it is testing strong resistance, and just broke an ascending trendline, so it may be under pressure for some time.

The next chart (above) shows why we think EUR/USD is bearish. According to the Elliot wave count, the declines from 1.60 have been impulsive (5-waves) and the rallies have been corrective (in three waves). Currently, it looks like EUR/USD is completing a 3-wave rally to correct the drop from 1.50 to 1.18.

Thus, since we generally like EUR/CHF long, and EUR/USD short, we want to go USD/CHF long:

 

The 15-yr monthly chart for USD/CHF (above) looks rather bullish. First, notice that a 5-wave decline is nearly complete, which indicates a strong counter-trend rally ahead (multi-year). Second, you can see that price is holding at a very strong, long-term trendline (we believe this line will hold, so if price closes below this line on two monthly candles, we will exit the position). Third, Wave-3 ended with a parabolic move. Then, the currency pair went on to retest the parabolic low twice, but so far has not broken it substantially. We think this is quite bullish. Fourth, notice the MACD divergence that could be potentially forming.

Zooming in on the USD/CHF chart (3y weekly chart above), you can see that Wave-5 has formed inside a channel that very closely resembles an ending diagonal, which indicates strong reversal ahead.

While the technicals appear strong for USD/CHF long, the COT data also supports this notion:

First, notice that the 78-week index for Commercial traders of USD are nearing the 100 percentile mark, meaning commercial traders are becoming very net long.

Swiss franc commercial traders are very close to the 0 percentile mark, indicating that they are very, very net short.

Overall, it is a bit frightening to go long USD/CHF when it’s in such a clear downtrend. However, the technicals indicate that it is nearing support, and the COT data shows that we’re taking on the same position as the smart money commercial traders.

Our trade plan is to exit at a loss if USD/CHF closes below the monthly trendline described above for two monthly candles. Our initial upside target is 1.05, and then 1.15.

Gold shall tank soon.

I last discussed Gold a month ago, and thought that if price broke above $1,250, I’d be wrong about Gold reversing. However, gold has tried to break above $1,250 several times now, and failed. I think the next big surprise in gold will be to the downside.

Notice Gold’s daily chart above. First, there is a 5-wave progression from the 1040 low set on Feb 5, 2010. 5-waves are usually followed by reversal. Second, Wave-V from 1040 looks to be forming as an ending diagonal, which as you know, reverses strongly. Third, notice the MACD divergence with price. And forth, notice the declining volume as gold is “breaking out” to new highs with bullish sentiment. Volume should be increasing sharply if this breakout were real.

I think all these factors should lead to a sharp decline in the price of gold in the near future.

Is the EUR almost exhausted on the downside?

I have been short EUR/USD since about 1.50, and now that it has dropped nearly 2000 pips, I am cautiously considering my exit strategy. I see two possible scenarios, outlined in the following chart.

Scenario 1 is the ending diagonal scenario in green. This implies limited additional downside to the 1.30-1.31 zone over the next few weeks.

The second scenario, which I am currently favoring, is a break through the support trendline, continuing an extended 5th wave from 1.38. The reason I’m favoring this scenario is that retail traders have shifted to net long in hordes, after the EUR tanked due to the Greece downgrade. Sentiment is not overly bearish the EUR, nor bullish the USD, so I think it would be perfect to see price drop to slightly below 1.23 low set in 2008, before starting an extended upward correction to 1.3250 or so.

Either way, I have moved my protective stop to 1.3425. If Scenario 1 is in play, I am not missing too much downside with this stop. And if Scenario 2 unfolds, price should not rally above 1.3425.

Get Ready for a Volatility Spike!

I think the Volatility index (VIX) is about to see a major rally. Notice in the daily chart below that price is carving out an ending diagonal pattern, and as you know, once price breaks out of these patterns, the upside is usually vicious!