Attempt Fresh Lows ?

The market is testing to break Oct 08 lows for the past 2 days. Technically, it seems that it is highly probable that it could break the Oct lows. The market is not in oversold position yet (in daily chart). I would abandon any long position (if Ihave any), except my AIG shares which I collected by selling Oct 2.5 Put last month. For AIG, I am now waiting for the right time to sell either the 2.5 or 3.0 Call option.

My Dec and Jan Put options are still in position.

Despite analysts' bullish views on IBM (after its earnings result recently), I bought IBM Put options. I do not believe that IBM is immune to the market downslide. So after the initial euphoria, IBM slide downwards. Likewise for AAPL. While AAPL gave a grim forecast for its next quarter, the market seems to believe that AAPL mgt are being careful again and want to under promise but overdeliver. However, I feel that this round would be different. The next earnings could indeed be lower than analysts' expectations. Anyway, we shall see what happens next.

PersianCat (Millionaire-in-progress)

Jewish Holidays

Check out the Jewish holidays at:
http://www.chabad.org/calendar/holidays_cdo/aid/357733/jewish/2008-Holiday-Listing.htm

While I do not celebrate Jewish holidays, as traders we should be aware of them. During the Jewish holidays that do not permit any work, the market volume tends to shrink - sometimes by more than half. The market movement for the day could easily be skewed in low volume market days.

PersianCat (Millionaire-in-progress)

Singapore Stock Market

I am now looking at investing my CPF funds in the Singapore stock market. The Singapore market can go down further and I want it to go down further. Then I will start picking up the blue chips stocks.

Intended holding period for my CPF investments would be 3-7 yrs. Target returns 100% to 300%. Target might be more depending on how low I pick up the stocks. For my CPF funds, I typically invest, as I do not have time to monitor it. For my cash funds, I trade.

While Temasek and GIC targets a single digit returns per annum for their long term investment, I targets more than 20% per annum for my CPF investment. I typically gets more. The trick is to cash out when the market gets too hot (I did cashed out most of my positions before the November dip last year) and buy into the market when most people are fearful.

As Warren Buffet said, " Be fearful when others are greedy, and Be greedy when others are fearful" .

PersianCat (Millionaire-in-progress)

Learn From Black October

Intially, I wanted to take a break from any handholding sessions and Live Trading sessions in the month of October. My reason being that during that month, I would want to concentrate on my trades as October tends to be a very exciting month in a bear market.

But due to requests from the current batch of handholding sessions, I am conducting 4 Live Trading sessions in this month of October. What a month it have been. The market is extremely hot and volatile.

As I mentioned to the participants in my Live Trading sessions, even if we do not trade, we should watch the market. Look out for patterns and learn from it. The market patterns always repeat itself. A similar type of bear market will repeat itself in about 10-12 years again. Great amount of money will change hands again. Even the experience hands can get killed if they are too over-confident. Risk management is key to not only surviving in the market but do well in the market.

PersianCat (Millionaire-in-progress)

It Is Really A Bounce Worth Waiting For !!!

The Bounce as expected came on Monday. What a Bounce!!! It is beyond my expectations.

• The DOW Index bounced more than 936 points from its previous close
• The S&P500 Index bounced more than 104 points from its previous close
• The Nasdaq Composite Index bounced more than 194 points from its previous close

I have closed my SPY Nov 90 Call on Monday, when it showed some retracement. I was waiting to re-enter the market with a SPY Nov 95 Call or SPY Nov 100 Call. However, I could not find the right retracement level. The market just went further upwards after a very short retracement. Nevertheless, I am thankful to have made more than 50% by just leaving my position over the weakend.

Yesterday, the market did retraced sufficiently. I am currently not sure of the immediate market direction.

The earnings season has just started again. The market fundamentals are still very weak. Generally, the results and/or earnings guidance should not be good. So the market can be expected to go down again. The bottom is not there yet. I am now considering some earnings play.

PersianCat (Millionaire-in-progress)

The Average Investor Mentality

I received this from Wendy (she attended my handholding sessions). It is a fun guide to an average investor's mentality. Since we do not want to be an average investor, we should then make sure we do not think like an average investor.

PersianCat (Millionaire-in-progress)

The Market Cycle

One of my trading buddies shared the above market cycle with me. I thought my readers would benefit from the above.

My 2 cts worth is that we are definitely beyond Fear Stage. Likely to be in the Panic Stage. Anger Stage - perhaps not yet.

PersianCat (Millionaire-in-progress)

The Bounce Worth Waiting For?

I closed my short positions on Wednesday last week because the market was showing signs of reversal and I would not be around when the market opened on Thursday - Hari Raya visiting. Thus I am locking in my profits. The market dropped further on Thursday and Friday last week. The DOW index and the S&P500 Index breached its 78.6% Fibonacci level.

However, towards the end of Friday's close, the market bounced significantly from its lows. The news that the G7 countries are working on something definitely helped. The VIX index was also on an all-time high. The market is grossly oversold. It needs to rest and have a short rally. I have bought Nov SPY Call on Friday. So far it is positive. Will it gapped up and bounce up today? We shall see what happens next .....

Over the weekend, the G7 countries dissapointed the market. They have done N.A.T.O. - No Action, Talk Only stance. However, the EU countries are more aggressive in soothing the markets. That could help in reducing the panic. If the European markets and Asian markets ends positive today, it is likely that the US markets ends positive too today - unless more bad news are released again.

PersianCat (Millionaire-in-progress)

Market looking for a Reversal

Today, the charts are showing signs of reversals. I am happy to close all my short positions :) - I am locking in my profits. I am now looking for clearer signals. The market might just have a short rally over a few days before continuing its downwards trend.

For the next round of shorting, I might short more of retail stocks.

Cheers !!!

PersianCat (Millionaire-in-progress)

How to Play AIG

I have been looking at AIG eversince one of my trading buddies raise this question to me about 2 weeks ago - "Should I sell AIG Put?"

After thinking through, I came out with the following and I thought I should share with others who are reading my blog.

Assumptions:

• The U.S. Government would not let AIG failed after pumping US$85 billion. Otherwise. they would look like a fool and there would be a public backlash - apart from a financial backlash.
• On a worst case scenario, AIG will be taken over by the U.S. government just like it did to Freddie Mac and Fannie Mae. The stock price would then hovers around $1.
• The AIG stock can go higher over a longer term.

At the moment, AIG is hovering around $4. About 2 weeks ago, it is hovering around $3. The strategies below were based on the stock and option price about 2 weeks ago.

1. Strategy 1 - Sell the Put options to get the shares at a cheaper price.

• Instead of buying the AIG shares outright at $3, we sell the Oct $3 Put for $0.80.
• If the stock goes above $3 on expiry, we keep the $0.80. If this happens, we repeat the strategy again by selling the Nov Put.
• If the stock goes below $3 on expiry, we buy the shares for $3. However, since we already pocketed the $0.80 premium when we sell the Put, our cost is effectively $2.20. If this happens, go to Srategy 2 or Strategy 3.

2. Strategy 2 - Sell the Call (Playing Covered Call) to collect more pocket money

• Sell front month Call to collect pocket money. In this case, sell the Nov Call (e.g. $3 Call for $0.80)
• If the stock goes above $3 upon expiry, we have to sell the shares for $3. But we have already pocketed $0.80. Our capital was $2.20 but our returns is $0.80. Good money !!! Then Go back to Strategy 1.
• If the stock goes below $3 upon expiry, repeat Strategy 2 and sell the next front month i.e. Dec Call. If you repeat this 3 times, you would have recouped you capital of $2.20.

3. Strategy 3 - Play Strategy 2 and and Strategy 1 at the same time.

Risk:

• If you already collected the shares, the stock may go down to $1. From $3 or $4 stock to a $1 stock.
• If you already collected the shares, and you sell the Call options, the stock may go to say $10. You lost the opportunity to earn more. Covered Call strategy gives limited profit.

Cheers !!!

PersianCat (Millionaire-in-progress)

So What's Next?

The 3 major indices closed a new 52-week low again just now. The next level to monitor remained the same as the last blog entry yesterday.

Today, the new seasons of earnings announcement commenced with AA. It gave a worst than expected earnings results. The stock tanked further after market hours.

Whether a stock goes up or down after its earnings results generally depends on 2 things, the earnings results and its forecast for the next quarter.

With the current market environment, most companies would not dare forecast a better than expected earnings results. As such, I expect the market to drop further this quarter unless there are very good news to lift the market from the Feds, Hank Paulson, etc .

Coincidently, in a bear market, October month is typically a bad month for the Bulls. This is the month to short the market until the chart says otherwise. Typically too, market tends to plunge on Monday or Friday (Black Monday or Black Friday). This is the month to make money!!!

Beware of a quick rebounce though!

Cheers!!!

PersianCat (Millionaire-in-progress)

Dow Broke below 10,000

All the 3 major indices broke the 61.8% Fibonacci level. Interestingly, the host in CNBC were not showing or reporting the panic in the market. They mentioned that it have been a 'smooth slide downwards'. Perhaps, they were told not to aggravate the situation by not reporting the panic (if any).

Anyway, the Dow Jones Index broke its 10,000 mark and more importantly, it stayed below that mark. Psychologically, the market still seems to see lots of bearishness in the market.

The next Pit stop would be the 78.6% Fibonacci level:

• DOW = Around 8,700 (but the market will look at 9,000 followed by 8,500)
• S&P 500 = Around 950 (but the market will look for 1,000 followed by 950)
• Nasdaq Composite = Around 1480 (but the market will look for 1620 followed by 1480)

Having said that, yesterday, all the 3 major indices had long shadow in its candlestick. Perhaps, the market need to rest and consolidate before making its next move. I would be careful though. If an interim reversal is shown in the market, I might close some, if not all of my short plays.

The European and Asian Markets are currently having a positive rebounce. Wall Street might just follow suit.

Cheers!!!

PersianCat (Millionaire-in-progress)

Next Pit Stop

The market rewards those who are able to read the charts and have the patience to see it through. As expected, the market went down further. The 3 major indices broke its 52-week low again last Friday.

The next pit stop (a term borrowed from the F1 fever) for the 3 major indices are:

• DOW = 9900 - 9700 region (around 61.8% Fibo level) on a monthly chart
• S&P500 = 1080 (around 61.8% Fibo level) on a monthly chart. It is reaching that level soon - likely to be today.
• Nasdaq Composite= 1780 (around 61.8% Fibo level) on a monthly chart.

Weak sectors are still the usual:

• housing
• financials
• retails (selected)
• Tech stocks

Cheers !!!

PersianCat (Millionaire-in-progress)

KBH & Housing Stocks

KBH as expected, released a worse than expected losses. Housing stocks are not seeing bottom yet. However, Jim Cramer said in CNBC yesterday that KBH is a good stock to buy and hold. The stock went up after what he said yesterday. I learnt not to trust what Cramer says. (like his Bear Stearns fiasco).

Anyway, for housing stocks, it is good to sell on rallies. The housing stocks such as TOL, KBH, RYL had been having a good time recently. So it should be good to short.

If there is no other good news, I expect KBH and the other housing stocks to gap down and stay down.

Careful though, the USD700 billion bailout plan which is on and then off, might be on again and spoil my shorts. As a rule, I shorted using Jan options for housing stocks.

I played both Jan Put options and Bear Call Spread for housing stocks.

- PersianCat (Millionaire-in-progress)

-------
08:04
KBH KB Home reports wider than expected loss, misses on revs (21.16 ) - (From Breifing.com)
Reports Q3 (Aug) loss of $1.87 per share, $0.65 worse than the First Call consensus of ($1.22); revenues fell 55.7% year/year to $681.6 mln vs the $734.7 mln consensus. The 2008 third quarter results included a pretax, non-cash charge of $82.2 mln for inventory and joint venture impairments and a charge of $58.1 mln to record a valuation allowance against net deferred tax assets generated during the quarter. The co's cash balance at August 31, 2008 totaled $942.5 mln, up 46% from $645.9 mln at August 31, 2007. The Company's debt balance at the end of the current quarter was $1.88 billion, down $284.1 mln from $2.16 billion at the end of the 2007 third quarter, largely due to the redemption of debt. "Continued deterioration in new home demand, new and existing home prices, excessive inventories and mortgage credit availability prevailed across most U.S. housing markets in the third quarter... These difficult conditions have now been exacerbated by the recent, unprecedented turmoil in financial and credit markets, and it is too early to assess whether the federal government's proposed interventions will be effective. As our industry navigates a housing market decline now subsumed by a larger global financial crisis, we at KB Home continue to focus on three integrated strategic objectives: maintaining a strong financial position, restoring operational profitability and positioning ourselves to capitalize on a housing market recovery when it occurs... The sharp decline in net orders we experienced in the third quarter reflects the broader dynamics of the housing market and our strategic responses to these conditions - reducing our active community count, implementing a comprehensive product transition and executing a more disciplined pricing strategy... Market fundamentals appear unlikely to improve significantly in the near term, as foreclosures continue to rise, housing inventory overhang remains at historically high levels and mortgages have become more difficult to obtain. In this environment, we will continue to pursue opportunities to optimize our financial results while operating conditions in our markets across the country move, at varying rates, towards a long-term supply and demand equilibrium."

Market Reversal

Dear All,

Dow Jones Index

S&P500 Index

Nasdaq Composite Index

Yesterday we had a strong market reversal. The major indices had very strong showing with extremely good day ranges:

• DOW - more than 600 points
• S&P500 - more than 77 points
• Nasdaq Composite - more than 131 points

Whether the market sustains this strong reversal today depends on how Paulson plays his cards at 10am EST - when he will be giving a news conference addressing the measures that he is proposing. The RTC proposal or the likes of it seems to have boost market confidence. Similar proposals were seen in Asia when it had its economic crisis years back. It seems to work.

For the moment, I will abandon all shorting views and wait for a confirmation of trend. I may convert my Dec and Jan Puts to calendar spreads instead of taking immediate losses. The IV is high - so good to sell options. This is a repair strategy.

The market fundamentals are still bad. The market may still make another round of downtrend. The current market is not for the faint-hearted.

PersianCat (Millionaire-in-progress)

AAPL Play Updates

Closed my AAPL Aug 150 Call at $18.30 yesterday for a 129% return over 2 days.

AAPL - Fill the Gap Strategy

Chart 1: Nasdaq Composite Index

Chart 2: AAPL 52-Week Chart

Chart 3: AAPL Intra-day Chart

The following happened while I was conducting a handholding session yesterday and demonstrated a “Live” trade on a paper trading account.

AAPL announced their quarterly earnings results the night before (21 July 08 - after market close). As usual, it released a stunning set of results. But the stock gapped down at pre-market hours (as much as $18.00) due to less than expected earnings forecast. But AAPL is known to lower its analysts' expectations by lowering its forecast. A similar gap down happened in April when AAPL gave a lower than expected forecast. But the stock subsequently reversed and went up. A possible Fill-the-Gap strategy is identified.

• Checked the 3 major indices – All pointing a bear rally. Nasdaq Composite Index also showed a triple bottom in the daily chart (Chart 1)
• AAPL resting at its 38.2% Fibonacci Level before the Gapped down in its daily chart (Chart 2)
• RSI and Stochastics are at a good level in the intraday chart
• Refer to Chart 3 for Entry & Target. The stop loss is at the lowest of the first candle

Initially, I planned to enter immediately after the stock went above the ideal point - buying AAPL Aug 150 Call option for $7.00. In the midst of the excitement, instead of buying, I sold the Call option instead. I realized my mistake. By the time I closed my position and opened a new position in AAPL Aug 150 Call Option, I can only manage to enter a trade at $8.00. The mistake cost me an opportunity cost of $1.00.

In the class, I mentioned that if the stock remained around or below the 38.2%Fibonacci level (in an intraday chart) towards the end of the day, I would take my profits and run. However, if the stock hits the 61.8% Fibonacci Level, I may consider leaving the options overnight. i.e. changing my stance from a day trade to a swing trade.

The stock hovered at around its 38.2% Fibonacci level in intraday chart, which coincided with the 50% Fibonacci level in daily chart. Hence, at that level, it is a strong resistance. However, my intuition (at around 11:30pm) says that the stock will break the resistance. As to when exactly, I am not sure. It did break the resistance around 1:15pm and it went pass my two targets.

By the end of the day, the stock close around $162. My 150 Call option is deep-in-the-money with a closing price of around $14.575. That is, if I were to close my position before the end of the day, I would easily made $6.575 x 100 (before commission) per option contract or about 82.2% return in one day. I left the position open. On hindsight, I should have closed my position and opened a fresh Aug 165 Call at a lower premium (and thus locking-in my profit).

PersianCat (Millionaire-in-progress)

We had more bad news ...

The market had one bad news after another last week. FNM, FRE and IndyMac are in trouble. Iran missile testings also doesn't help the markets. The list goes on....... Any attempt by the Bulls to rally up the market failed miserably.

The market is in its exciting period. Lots of volatility. Lots of traders lose money to the market makers. A lot to learn for all. We shall see what happens next.

During this period, I tends to trade intra-day rather than keeping my trades overnight.

PersianCat (Millionaire-in-progress)

Market in Triple Bottom?

It's been sometime since I last write. I have been busy with other things including sharpening the content and delivery of my handholding sessions.

I''ve been mentioning before and repeat it again in my handholding sessions that the current U.S. market correction is not the normal correction. Things are just too bad at the moment to be bullish about the market. So it is no surprise that the DOW drops 20% from its peak. I do expect a little more - maybe another 10% down.

But now, it is a good time to take stock after the July 4th Independence Day holiday.

The three major indices (DOW, S&P500 and Nasdaq Composite Index) are all in oversold territory. The oscillators (e.g. RSI, stochastics) for each of the 3 indices are at the low end. While I believe that the market is in for another thrashing, it needs to rest and retrace (in this case, go up) a bit before continuing its downtrend. Unless a series of bad news or an extremely bad news is announced, any little good news might push the market upwards in the short-term.

PersianCat (Millionaire-in-progress)


As such, what we could be seeing is a possible triple bottom being formed.

Bears Are In Play Again?

After experiencing a double bottom (in Jan and Mar 08), the major indices reversed its downtrend and broke its respective neckline to confirm an uptrend is established. Indeed, since mid-March, the major indices moved within an uptrend channel.

However, since the last 3 weeks, an interesting formation appeared in the charts. The Dow, S&P500 and the Nasdaq Composite Indices experienced resistance at the SMA200. Furthermore, the markets closed negative in huge numbers over the last 2 days.

• The Dow30 index broke below its uptrend channel and is resting at the SMA50.
• The S&P500 index broke below its uptrend channel and is resting at the SMA30.
• The Nasdaq Composite index is resting at the low end of the uptrend channel.

Would the market continues its downtrend? It seems so.

PersianCat (Millionaire-in-progress)