Outlook: Cloudy with Chance of Falling Prices

Friday brought some interesting action in the markets which makes things still uncertain going forward. In the morning 30 mins before the open I had noticed that /ZN had finally broken a month long flag to the upside which pointed to downside in stocks. I tweeted as much and once we opened we held up for a bit until we got the consumer sentiment numbers which were worse than expected on top of jobless claims being worse and CPI coming in essentially flat with no inflation in sight.


We can see that the EUR/USD has pulled back to its trend line with recent strength in the dollar. If the rally in equities is likely to continue we need to see this level hold. If it happens to fail it would be a good idea to be short the market in my opinion. If we look at /ES daily action we can see the sell off after the release of consumer sentiment, we then flagged all day near the lows. Those who day trade and know the market profile would say that this generally means the market is "accepting" this new price level which is significant because it is back below the 1000 level. However, we can see right at that 3:30 mark the market rallied into the close. This rally is suspect in my opinion due to the fact that it came right at a time stamp indicating program buying/short covering. Nonetheless it did move 10 points in 30 mins. Typically when this type of action occurs the market profile believer would tell you that the higher probability event is a break down from the flag.

We can see clearly /ZN break it's recent down trend and more significantly its long term down trend of the past 6 months which I hadn't noticed until I zoomed out. This is a big tell in my opinion and generally points to downsie in stocks but sometimes the correlations do not work and it is just readjusting risk. However, if we use history as a guide it has made a decent move after breaking channels. Lastly, we can see that oil failed to make a new high and is dangerously close to breaking its month long up trend as well.

Because some of these other metrics have not necessarily confirmed what /ZN is possibly telling I wouldn't be racing out to go 100% short(that would be stupid at any time). However I would be careful initiating any new long positions at these levels that aren't extremely strong candidates.

It is always frustrating to watch your account flucuate especially when you have larger gains in the beginning of the day and give back most into the close. On the bright side I guess I can be glad I had a gain on a down day even if it was small. If I was able to be break even on down days and up on up days I'd be rich! Alas that won't happen but I can do my best to try.

My longs actually seem to be hanging in there fairly well. V and WFR have done decently with V slightly above my exit of 67.50 and WFR holding its support level nicely. Much more movement lower and I will have to cut them. ADM will likely get the boot on monday as it has acted fairly poor all week and is dropping below support AND now the 50 SMA meaning people do not want to own it and I likely shouldn't either even though I have long dated options.

Even though the McClellan Oscillator is showing that we have worked off a decent amount of our overbought condition the bullish percent is still in extreme territory. We can see below that the bullish percent on the Nasdaq 100, which has led so far, is potentially topping out with a double top at its extreme reading.


If this does set up to reverse I will still need some long plays. The tough thing is that most stocks will get dragged down regardless and the shippers seem to be doing poorly even with the market going up. The hard thing though is that the Baltic Dry Index has been flagging and is currently at the lower end of its recent channel and at the support line of its longer term uptrend(which unfortunately can't be seen).

This could make it a lower risk long entry as a hedge if we do start to go down. I had a synthetic long position in DSX that I had to cut with a loss recently so the shippers are not seeming too great to me in the short term but I like them long term.

My short options are currently in decent shape to expire worthless however I do expect the usual expiration week shenanigans. Currently I am short OTM puts on FAZ and OTM calls on UYM. In addition I am long puts on SPY and long calls on SRS to balance out my other long calls on ADM, LVS, V and WFR.

LVS has worked nicely so far, not as nicely as if I had gone only long calls but still a nice gain regardless and with the uncertain nature of their contract negotiating it would be stupid to not be hedged in some sort of fashion. I may not have chosen the best method for hedging but that is what learning is all about so I can do better next time.

I cut my /ZC position which so far has been a good move as it broke back below 330. I may look to get long again either soybeans or wheat in the near future but I will see what shapes up next week first.

Past couple days I gave back a percent then gained it back friday so I am where I was before. I guess as long as I don't lose money like I have recently I'll be in decent shape to make more of a recovery.

Total Return for 2009: 138%