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.

Trimming back Gold long

A year ago I posted that gold was looking bullish. Since then price has rallied about 25-30%. I'm cutting back a large portion of my position because I think the market could see a pullback soon.

On the weekly chart above, note how price exploded higher after breaking out of the ending diagonal pattern. This is just the behavior I was looking for. However, price is reaching $1400 which is the top of the ending diagonal and I would expect there to be some significant resistance here.

The more concerning problem is that commercial traders clearly think that gold prices are reaching overbought levels and they're hedging themselves more than at any point in the past 16 years. 

However, I don't think the bull market is over. I think we'll see a lull or correction for some time as commercial traders unwind their hedges. Then, once COT levels are more normalized, we could see higher prices.

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.

USD/CAD long - Wave 5

USD/CAD has dropped to my target zone of 1.3250 so I'm going long. My ultimate target is 1.44 or higher. I will exit if I see two daily candles that close below 1.3190.

On the weekly chart below, you'll notice a clear Elliot wave count. I believe we are nearly complete with a long-term Wave 4. Note that the market has punished bulls after the massive parabolic spike. However, we are now in the eighth consecutive week of declines. This persistent decline has only occurred twice in the past 20 years: 1996 and 2007. In each of those cases, the market declined for 9 straight weeks, then initiated a sustained rally. Also of interest is that 1.3250 marks a roughly 11% decline from the top at 1.4680. The wave 2 correction back 2012 was also ~11%.

On the daily chart, notice that price dropped from 1.4680 nearly non-stop, but it did carve out a triangle in the middle. Triangles often precede the final thrust before price reverses and continues the main trend (up). You can see a confluence of trendlines that are acting as support. If price closes below these for two days in a row, I will exit my trade at a loss.

USD/CAD Short – 700 pips profit potential

I'm going short USD/CAD around 1.4060-1.4250. Will exit on 2 daily closes above 4250. Target is 1.3500.

On the monthly chart above, note the confluence of several trend lines. Also note the Elliot Wave count which is pretty clearly indicating a completion of a 5-wave cycle within the larger wave 3.

On the daily chart, you can see that price is hitting the confluence of two different-degree channel trendlines. Also, you can see the fractal breakdown of wave-v from the Monthly chart.

If price manages to close above 1.4250 2-3 times (i.e. daily closes above the channel trendlines), I will exit. There could be a strong intraday rally above this level as price overthrows the channel in a final burst, but it should quickly reverse and close within the bounds of the lines. The target is demarked in red, around 1.3500.

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.

Bitcoin fever entering final stage

In April, 2013 I successfully predicted a severe correction in Bitcoins based on bubble principles. 7 months later, Bitcoin is at all-time highs once again. According to Elliot Wave Principle, market movements following the overall trend of that market occur in 5 waves: 3 impulsive waves with the trend and 2 corrective waves against the trend. Once the 5-waves are complete, a prolonged corrective period occurs where prices reverse the overall trend.

Take a look at the charts below (note that each successive chart is a magnification of the previous chart, as identified by the red dashed box in each larger chart). The first chart below shows lifetime price action. Note that prices have clearly moved in 5-waves. Interestingly, each wave formed it’s own mini-bubble:

1. The first wave ended in June, 2011, at $30. It was parabolic in nature, and corrected all the way down to $2 by Dec, 2012.
2. The third wave ended in April, 2013 at 266. Once again, it was parabolic in nature, and suffered an extremely sharp 80% decline in a few days. Then, prices moved sideways for a few months to finish correcting the excess.
3. Finally, the 5th wave is following the typical parabolic pattern. Buyers who entered the market near the end of Wave3 (in the $50-200 range) are all making a huge profit (5-10x). However, since we are nearing the end of the cycle, an imminent, long-term correction is about to begin. This will be a painful downtrend characterized by daily decrease in prices, with the occasional brief rally.

The second chart below shows 6 months starting around the Wave 4 low from the chart above. Note that the wave principle is fractal in nature, and Wave 5 of the larger trend breaks down into 5 subwaves (i thru v).

Finally, looking at the 10-day chart starting around the Wave iv low from the chart above, we see 5-waves unfolding once again. Drilling down through each successive chart indicates that at each time frame, we are in the 5th wave of the rally.

From the purely technical perspective of Elliot Wave analysis, the charts are showing a marked exhaustion of the 5-wave trend. While there is potentially a bit more upside left, I would predict that the trend is weeks, if not days away from expiring.

One other interesting point is the “personality” of the 5th wave. Elliot Waves have distinct characteristics since they reflect the mentality of the herd. In wave 5, “…The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top.” (Hint, hint, family and friends finally “seeing the light”). Furthermore, “Volume is often lower in wave five than in wave three” as you can see from the first chart. Finally, “…At the end of a major bull market, bears may very well be ridiculed…” as evidenced by yours truly.

Bitcoins may be a very useful medium of exchange and they may prove to be successful long term. But in the medium term, a market will always work in the same way: It will never go up forever, and it will always make sure to minimize real gains for investors by natural price corrections. Therefore, if you’re holding on to a nice profit in Bitcoins, it may be a wise time to sell the majority. You will have a chance to buy back at much reduced prices in the coming months.

GLD correction nearly over

Gold made headlines today dropping about 6%. I think this drop is more of a stop-run then a breakout because it happened so rapidly and on massive volume. Gold has bounced off the $1,500 level for a couple years now so it makes sense that it would drop below this level to knock out the weak hands.

From an Elliot Wave perspective, gold has been tracing out a nice 3-wave flat correction. Wave A is 3-waves, Wave B is 3-waves, and Wave C is 5-waves, making the drop to new lows appear as the start of a new downtrend. Furthermore, there is quite a bit of negative commentary about gold so we could be near a temporary low, and possibly a large swing low. Gold should recover and move back above $1,500 within the next month or two or else the downtrend could continue.

Divergence Forming on AAPL… Buyers beware

I posted a cautionary article about AAPL a few weeks ago, but it continues its massive rally. Take a look at the chart below, and then throw caution to the winds. Its 5-wave small-time-frame rally appears just about finished, and there is ominous MACD divergence.

Dare to short AAPL?

These days, you’d be crazy to even think about shorting AAPL, right? They just had killer earnings and are on track to earn $40+/share in 2012, giving them a nice, comfortable valuation. However, the charts point to the notion that a long-term top is right around the corner.

First, on the monthly chart above, note that AAPL appears ripe to complete a 5-wave rally that started in 1998! I would expect a multi-year correction to ensue soon based on this chart alone.

On the weekly chart, you can see that Wave-V from the first chart has subdivided nicely into 5-waves as well. Even on this shorter timeframe, the wave pattern indicates that upside is limited.

 

The daily chart shows a typical parabolic blow off to finish Wave-V. Importantly, recent price action is confirming that a top is very near:

During a climax top, a stock leader that has risen for many months will suddenly take off and run up much faster than it has in any week since the start of its original move. On a weekly chart, the spread from the absolute low to the absolute high of the week in almost all examples will be wider than any price spread in any week so far.

- William O’Neil in The Successful Investor, pg. 80

This weekly candle is on track for being the largest weekly gain in dollar terms, ever. Furthermore, we’ve seen 5 straight days of gains, with today’s price action including a large gap up followed by a large rally. This is typical blow off action, and it implies that the market is becoming too one-sided to sustain further long-term price rises. Look for a multi-month or multi-year correction to start soon.

USD/CHF Long-term Update

I’ve been quite wrong about the USD/CHF. From my initial entry, I’m down about 1200 pips.

However, if you think the USD/CHF will continue dropping forever, think again. On a very long-term time frame, it is approaching very strong support.

On the 20y monthly chart above, notice that from 2004 through 2010, USD/CHF consolidated in a picture perfect triangle. Each subwave was in a 3-wave structure, and price held within accurately defined trendlines.

Since 2010, we’ve seen the characteristic “thrust” out of the triangle to the downside. A typical target is normally the 100% extension of the height of the triangle, which is around .8000. Also interesting is that the 50% extension of the previous down wave from 2000-2004 is right @ .8200 or so. Because triangles are precede the final move in a trend, I believe we’ll see a basing pattern and subsequent reversal in the coming months. Price should stay above .79-.80 for this thesis to pan out.

NEP could be a BUY

1.5 years ago, almost to the day, I projected that NEP was nearly at a peak, and would suffer poor returns for the following 2-3 years. Unbeknownst to all the investors, there were several negative developments that arose from NEP, including accounting problems which led to a trading freeze and near delistment from the AMEX. As I anticipated from the charts, volume, and sentiment, price has since performed extremely poorly, averaging returns of –60% annually. All things come to an end, however, and NEP seems to have weathered the storm. It appears attractively priced, and I’m buying around $3. Here’s why:

1. NEP had $75m in cash as of 3/31/11, and currently has a market cap of $105m. If the auditors are not lying, then this is a pretty good valuation at which to buy NEP.
2. The accounting issues that plagued NEP are out of the way.
3. The lawsuits which sprung out of the trading halt and claimed that NEP breached its fiduciary duty to its stockholders have been dropped.
4. Volume is mostly down-trending as price declines (see chart below), indicating a decreasing level of interest in the stock. This is preferable to seeing volume increase as the stock tumbles which indicates lack of confidence in the company.
5. There was a significant basher article by “Bigfish” research which cause the stock to drop significantly on volume of about 3m shares). Then, the next day, there was a massive short squeeze on 3m shares as well. This price action is simlar to what happened in Dec 2009, except opposite (see chart). Back then, price spiked up in the direction of the uptrend on 3m shares, reversed violently the next day on 3m shares, and then proceeded to retest and exceed the previous highs. Now we’re seeing the same pattern. Call me paranoid, but it seems like someone is playing those spikes, and it tells me that we’re near a turn.
6. Finally, from an Elliot-wave perspective, we had a complex 3-wave down trend (see chart). This tells me that we could see a basing pattern and a rise out of NEP.
7. I conclude that NEP’s return prospects going forward are now positive.

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!

AAPL’s Triangle

AAPL just completed a very nice triangle formation. I think this indicates that AAPL is about to start an extended downtrend. The upside target is 360-361, and could drop to $300 or lower.

Notice in the chart above the clean triangle pattern that formed in the past few weeks. According to Robert Prechter’s Elliot Wave Theory:

A triangle always occurs in a position prior to the final actionary wave in the pattern of one larger degree, i.e., as wave four in an impulse…

On the basis of our experience with triangles…we propose that often the time at which the boundary lines of a contracting triangle reach an apex coincides with a turning point in the market.

Check out the examples below to see how triangles led to nice reversals.

EUR/USD Before and After:

NEP Before and After:

  

I believe it is time to become cautious with AAPL.

SPX 1290 is the level to watch

If SPX does reverse soon, as I’m expecting, 1290 looks like a good level for the market to peak at.

Notice in the chart above that not only is 1290 the level where Wave-C = .5*Wave-A, it is also the exact level where Wave-v of Wave-C = Wave-i of Wave-C. These tight Fibonacci correlations lend support to the idea that the market will top out around 1290.

SPX Update

SPX may be near completing a 2-year uptrend. I remain bearish, especially as the market nears the 1250-1300 zone.

Notice in the daily chart above that the market made a strong 5-wave move from Oct 2007 to Mar 2009. Following this, we’ve seen an equally impressive 21-month rally that has taken SPX from 666 to 1245, an 86% rally. However, this rally appears to have subdivided into zig-zag 5-3-5 formation, and it is nearing strong trendline resistance.

Note that Wave-C is relatively muted compared to Wave-A. This makes sense to me given the fact that the looming trendlines are providing good selling pressure. Also, given the strength of Wave-A, one would expect Wave-C to be slightly more modest.

The daily chart above shows Wave-C of the rally from the Mar 2009 low. Notice that it unfolded in in a clear 5-wave pattern. Each corrective wave lasted about 3-4 weeks, similar to the corrective waves in Wave-A. The fifth wave coupled with MACD divergence tells me that the market is about to turn over.

I have been proven wrong so many times over the past 21 months. At this point, I see no reason for the market to form a major top near this level, but on the other hand, this kind of sentiment seems prevalent right now. The top occurs when no one is expecting it as a possibility.

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.

Can’t Help Myself!

UNG must be on investor’s most-hated list, because since the energy bubble peak in 2008, UNG has done nothing but drop. At some point, enough is enough, and I believe that point may be soon here. I’m going long here.

The daily UNG chart above shows a very clear 5-wave decline, with MACD divergence on the recent drop. Time to take a gamble.

Outta NEP

A few months ago, before NEP was halted, I went long based on trendline support. Today, I sold that long position for a small profit. I believe NEP could face continued headwinds for some time to come.

Check out the daily chart above: first, notice that NEP is running into the combination of three trendline resistance levels, around 6.60-7.00. Furthermore, I think it will take additional time to unwind the excesses that were generated in the parabolic run into Jan. 2010. NEP’s business is looking good, but supply and demand of shares always rules. I think enough people got shafted in the $8-12 zone that they will provide nice supply, holding the price lower.