COLD WINTER COMING?

One of the megatrends going on right now is energy costs rising. Here is a daily chart of Heating Oil, with a blue line just stating the obvious up trend. The fundamentals are actually bearish at this moment, and it is a time of the year where the seasonal high is typically made.

I am actively looking for a short entry in this market, although I am in no hurry to stand in front of this freight train. You can see the small speculators are the ones that are pushing this market higher. All else being equal, we want to fade them in a situation like this. However, we need to see a break in the uptrend in price before anything will happen on the downside.

I have learned the hard way over the years not to fight a moonshot like this, so look for sell signals, but only on price action that represents a break down of the trend.

As I sit here hoping the fire doesn't reach me I realized I had not posted yesterday in the midst of all of the turmoil.



As expected, we did not get a crash at the beginning of this week. It amazes me how after a big down day, how many people come out calling for another day just like it. The odds are so heavily against that, you just have to take the emotions out of investment decisions. It is hard to do, but it is what you need to do. If you run the tests on buying a gap down open after a day like Friday, there is a very strong up bias to that, not down.



I still expect us to meander sideways to lower for a bit, and it would be awfully nice to see the WillVal indicator at the bottom here drift into an under 20 reading for a buy spot. I do think this will happen. Next year should have a heavy upward bias, so the question just becomes where to best enter to take advantage of it? The end of this week has been the ideal seasonal low buy point. I am more than likely going to wait to see what the commercials have done in this Fridays report, and then make my decision. I think I will wait for an oversold reading in the WillVal at the very least, before going back in. I am not satisfied with the list of under valued stocks my methods are cranking out because among them are C and HD which are subject to further weakness due to housing. They may just languish, which is not what I am looking for.

I do have an alternate list of undervalued stocks that I got from a friend who uses a different approach than I do, which also has a few selections that I am not too pleased with. Sometimes you just have to go with the numbers, but I am digging deeply to find a numeric way a discrediting a few of these stocks. Until I get that resolved, I am going to stay flat.

The problem with C in particular, is there seems to be some funny accounting going on there, which may in reality make it over valued and not under valued.

CAN I SAY I TOLD YOU SO?

It is worthless in reality to make predictions, all we can do is observe what we see as we go along and try and make prudent bets on what will happen next. I did not outright predict a sharp drop like this, but I did predict a sideways to down move for a month or two. We obviously are getting that now, so what to do next?

The ideal seasonal low would be at the end of next week. Seasonals rarely repeat exactly, they just give us ball park views on what to look for and at what time. The market is getting very short term oversold here, so that does seem to be matching up well with the seasonal low point at the end of next week.

I am currently evaluating which stocks I want to get long when the buy signal pops up. I would suggest waiting for some short term strength just to avoid catching the falling knife. Nobody can consistently predict when these sharp drops will turn on a dime. The subprime effect is seemingly re-asserting itself today with some of the comments being made publicly. This is impossible to quantify, and is not even a consideration in my analysis of when to buy and sell.

The big rally in bonds is good news for stocks over the longer term, and those of you in my trading service got a very nice long side trade there this week, our biggest win in the last 4 years on an individual trade. Lower rates are good for stock prices. Maybe we get lucky and get a huge waterfall here to buy into, but I doubt that. Maybe a little bit more weakness, and then a short term low could be made which would be a buy point.

GOLDEN OPPORTUNITY

My apologies for having missed a few days, blogger was not allowing chart uploads. It is my intent to post something each day, so keep checking in.

Gold has had a very nice upward move that is continuing today as I post this. The trend is your friend, so if you are currently long there is no reason to change anything. However, notice below that the commercials have their largest net short position that I can find in the history of the data that I have. What this means is that if we were to get a break in the trend here, it would be a green light special for a short sale.

This is a trade I am lurking on with my trading service on a daily basis, looking for an entry. You cannot just go out and blindly short a market that is this strong because that just becomes a guessing game against random luck. However, at the very least do not commit to any new longs here, and tighten your stops on any long positions.

The one fly in the ointment is that the ideal seasonal high is in January, so it would be best if a sell set up at that time. With the commercials this short, I will overlook the seasonal if the pattern sets up properly.

FLY IN THE OINTMENT?

With the markets sailing along wonderfully, how could anything be wrong? For the most part we have the perfect storm going, lower rates and insiders bullish, right at the seasonal rally point. There are a couple of things that are a bit troubling. First, the A/D line has not made new highs yet while the DOW has. This divergence is pretty small, so not a huge worry yet, but it is something to keep an eye on.

Second, notice the large negative divergence in the Pro Go indicator at the bottom. I have explained what this is in the past, so scan the archives if you do not know. This quite frankly, is very troubling. I am looking very closely for a spot to buy back in, but this makes me think we may have a bit of a rough patch of a month or two. Rarely does the market continue upward, when this diverges by this amount.

One thing to keep in mind about divergences in indicators, they often occur against the trend and are not anything but profit taking indications. This is not ever a green light on it's own to short a market. However, this is occuring right at a point where we have a broadening formation at all times highs, so this is not a point to initiate new longs.

My guess is that we will go sideways to lower for a month or two, then launch a pretty good upward move again. I will be looking during this period for the stocks I want to buy, and when to enter. It is frustrating to have been out the last couple of weeks, I have missed a nice move, and my timing model still indicates a long position is appropriate. This tells me that just a blip for a short period, then off to the races again.

COTTON

This is another market that is setup for a decline. The short entry was at the red line with a stop above the highest high point by 1 tick. Again notice the heavy short position by the commercials and heavy long by the small specs. This by itself is not a lead pipe cinch, but it is a good starting point for an entry.

Some of the internals have not diverged yet which would make this a better setup, but it is good enough without them to take a shot. This is not a mechanical approach like many that I use, but the reality is that some discretion or judgement has to be used to trade profitably. If you can establish a basic structure that is somewhat mechanical, you can then use your experience to fine tune how you get in and out.

I do want to stress though, that it is imperative to establish how you will exit a trade before you enter it. This will help eliminate the emotional tugs on you that will develop as the trade progresses.

Heating Oil





For subscribers, here is a visual of the Heating Oil trade we currently have on, with the red line indicating our short entry at 2.2205. I have to delay posting this by a couple of days to be fair to clients. It would not be right to put it out in the public for everyone to see right at the time paying subscribers are getting into it. As a result posts like this about actual trades are going to be a few days after the fact. I will also put up some trades that lose to be fair and not paint an unbalanced picture of my trading. I have always done this in the past as readers know.

This market has been in a substantial uptrend along with the entire oil complex. Why in the world would you want to short something like this?



First, this market has weaker fundamentals than the other markets in the complex. Second, the commercials not pictured, are heavily short. Third, we have had some divergences in some underlying indicators telling us the time may be now. Also, we had a very low volatility reading, indicating a breakout one way or the other.



We have already taken profits on half our position with $1839/contract and are trailing down a stop to see if we can catch a larger move on the balance. Often you get picked off on the second half for a scratch on that portion. That is ok, because occasionally we will get a windfall on it, and we are risking nothing. We have already rung the register for some $$, so anything more is gravy. It is still possible that this is only a retracement in the uptrend, so it is prudent to keep the trailing stop at break even on the rest just in case we get going again on the upside.