Thursday, July 4, 2019

Trader Notes: Trading the Volatility. Part 2

The VIX and its inverse relationship with the markets.

The VIX, as a contrarian indicator, is an incredible weapon for technical traders to determine extreme conditions of bullish or bearishness of the market, using its inverse relationship: when the market is rallying, the VIX tends to drop; when the market is tanking the VIX tends to riseSmart and serious investors use it to bet against the crowd when its greed (or fear) levels are high. And mainly, they use it as protection or hedge for its investments.

The VIX, also known as the 'fear gauge', measures the frequency and intensity of changes in the SP500 in the short-term (30 days), through the implied volatility IV of its at-the-money call and put options. A level below 20 generally indicates a bearish or complacent market, while reads above 30 are generally associated with a large amount of volatility, and mean that investor fears are taking place. 

Smart traders usually "buy bargains" when volatility is high, taking advantage that the crowd is panicked closing positions: in a market sell-off, they are more inclined to buy VXX (the ETN that replicates the VIX behavior) puts or SPY calls as protection or as a speculative position without too much concern for the prices they have to pay. On the other side, with low volatility, and as long implied volatility is low, seems a good opportunity to buy VXX calls or SPY puts at reasonable prices as a protection for our portfolio. Investors who want to trade the VIX should keep in mind that VIX-linked products are short-term trading instruments, only for traders who know the risks.

How to play the VIX

First of all, is important to tell that isn't easy to trade the VIX: it's like an art. Experienced traders know that. It special behavior forces you to take jealous control of your trade. That's why is best make VIX trades only in the short-term. And, after trying in different timeframes, I get better and more clear results in the daily chart.

There is a chart that I always have visible on my Thinkorswim platform: the daily of the VIX with just two studies: the Bohlinger Bands and its moving average SMA200. As we know, the Bollinger Bands is a popular technical indicator to determine overbought and oversold conditions. In a range-bound market (as VIX accustoms) the BB works even better as prices travel between its two "rubber bands". On the other hand, the Simple Moving Average 200 is probably the most used and reliable average used by traders and investors, including smart investors. An example of its power and influence in the markets could be observed recently last year in December when a falling SPX index touches its SMA200 and originated an amazing rebound that lasts until today.

The candles represent the VIX daily price action, the grey line is the SP500, always in opposition. In purple, the upper and lower bands of the BB. The blue-sky dashed line is the SMA200. The VIX behavior with these two indicators is typical, so is a good idea take advantage of it in our trades.


Look at the chart above, taken from the past year 2018. First, verify the inverse correlation between the VIX and the SP500 index SPX. It happens all the time, like a 
mirror image. Second: as the VIX trades, its value raises or falls, as it bounces off the upper or lower band of the Bohlinger Bands. So:
- Go long in VXX when the VIX falls to the lower band of the BB. At that moment the market is at a peak and began a pullback, as you see in the chart. 
- The same idea, but contrary, is used for the upper band of the BB: go short in VXX, and verify the SP500 began to rebound. 
There are many more complex option strategies (spreads) to take advantage of this situation, that I will analyze in a future post.

Now, check the SMA200.  Last year was a very difficult resistance (then support) for the VIX to overcome. Review other years and verify that its a typical behavior of the VIX with its SMA200. Since August it rebound many times in that level (in the yellow circles). Finally, after three attempts, in early October the VIX breached its SMA200, and the SP500 now reversed dramatically. These breakouts are very attractive entry points for a disciplined trader. Notice that in early November and December, with the SMA200, now as support, had two new failed attempts to crossover it. And today, with the VIX in 16.14, is in its third attempt, so pay attention with the volatility behavior this week.

Strategy using the VIX spikes

This simple strategy is focused on the VIX daily chart. I suggest in this case, when trading, forget the SPX chart because, although they are inverse, this moves in a tendential way, different from the VIX that does it in very marked ranges, and can create confusion and anxiety for the novice trader. Even sometimes there are divergences between the two that can complicate more the analysis.

More than a strategy, its a tip when trading the VIX. In its daily chart notice the clear difference between its relative tops and bottoms: tops are spikes, like an inverted V, while bottoms are more rounded
- In the tops, this is because fear is the predominant feeling, that very fast becomes in panic. This rapid rise is usually followed by a bearish candle when the smart investors decide to start trading.
- On the other hand, in the bottoms of the VIX chart, the market is more complacent, greed is in charge of the traders' feelings and so the SPX costs more to fall, that's why bottoms are slower and full of false signals. 

The diligent trader has already grasped the idea of this strategy: trade in the spikes of the VIX daily chart, operating shorts or puts. To find an acceptable entry point, the Bohlinger Bands are useful: waiting for the moment when the bullish candle leaves the upper band with some slack. Then expect a next bearish candle that wraps it completely (or almost) the previous bullish. This candlestick is known as engulfing. The open of the next candle is my entry point. Everything very simple. However, there are a couple of undefined points in this strategy. One of them is not being clear about the exit. Perhaps the best idea is to set in advance a risk-reward, like the popular 1: 3 used by many traders, to determine the exit.

The other complicated point of this strategy is the location of the stop loss. The usual is that the VIX continues its fall the following days and is difficult it returns above the engulfing candle, however, it can happen. A double top would be formed, the most reliable figure in the technical analysis according to Alexander Elder, where we could confidently sell the VIX. The best plan is to trial daily the stop loss to a safe level.

The "VIX spike strategy" works best in its daily chart. Every year happens, few but powerful. In this chart, taken from 2015, we noticed two big spikes overcoming the upper band of the Bohlinger Bands (mid-October and mid-December, in the yellow circle), both followed by an engulfing candle that generates the quick and important reverse. Two more spikes happen in January and February 2016 (also in a yellow circle) but in both cases, its price didn't overcome the BB, so its reverse isn't as powerful as the 2015 spikes. Finally, in the pink circles, we had two spikes that haven't an engulfing candle enveloping them, so the reverse seems very unclear.

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Saturday, June 29, 2019

Trader Notes: Trading the Volatility. Part 1

One of the concepts most used, and perhaps less understood, in the world of trading is the volatility, that is, the degree of variation of the price of a stock in time, in both direction and speed. This variation is directly proportional to the risk. This makes a volatile stock more attractive for trade it (for short-term or swing traders in particular), but also riskier. Knowing how to use volatility in favor of obtaining benefits is one of the arts of stock trading.

Options and Implied Volatility

Known and used by all traders, the options are the best financial instrument to make money investing a fraction of the capital that we would use in stock as such. They are the right, not the obligation, to buy (option: call) or sell (option: put) an asset at a specific price within a specified date, through the paid of a premium. That is, the options involve price and time, the two variables that define volatility, which make it, its main protagonist.  (Please refer to Bill Johnson's book "Options Trading 101: from Theory to Application" for a complete understand of the world of options. I believe it has the best explanation: clear, and avoiding some complex terms for later studies). So, thanks Investopedia, let see at a glance, the main characteristics of this incredible financial instrument, from the concept of implied volatility, the basis of the option-pricing equation.

- Option premiums (its current price) have two components: intrinsic and time value. 
- Intrinsic value is an option's inherent value. The only factor that influences an option's intrinsic value is the underlying stock's price versus the option's strike price. No other factor can influence an option's intrinsic value. 
- Extrinsic value (time value) is the additional premium that is priced into an option, which represents the amount of time left until expiration. The price of time is influenced by various factors, such as time until expiration, stock price, strike price, and mainly the implied volatility.
- Implied volatility affects directly price options, and represents the expected volatility of a stock over the life of the option. As expectations change, option premiums react appropriately. 
- Implied volatility is directly influenced by the supply and demand of the underlying options and by the market's expectation of the share price's direction. As expectations rise, or as the demand for an option increases, implied volatility will rise. So, options that have high levels of implied volatility will result in high-priced option premiums. 
- Conversely, as the market's expectations decrease or demand for an option diminishes, implied volatility will decrease. Options containing lower levels of implied volatility will result in cheaper option prices
- So, a change in implied volatility for the worse can create losses, however, you are right about the stock's direction. That's why options are very difficult for traders: you need to know not only direction but speed.
- Each listed option has a unique sensitivity to implied volatility changes. For example, short-dated options will be less sensitive to implied volatility, while long-dated options will be more sensitive. This is based on the fact that long-dated options have more time value priced into them, while short-dated options have less. 
- The "Greeks" (Delta, Theta, Vega, and Gamma), a set of risk measures, help to value this sensitivity, or exposition, of the option to time decay, implied volatility, price. Its use is ideal for analyzing more complex option spreads as calendars, verticals, straddles, butterflies or iron condors.
- Each strike price will also respond differently to implied volatility changes. Options with strike prices that are at the money are most sensitive to implied volatility changes, while options that are further in the money or out of the money will be less sensitive to implied volatility changes.
- Implied volatility fluctuates the same way prices do. Implied volatility is expressed in percentage terms and is relative to the underlying stock and how volatile it is. So, each stock volatility should not be compared to another stock volatility range.
Implied volatility moves in cycles: high-volatility periods are followed by low-volatility periods, and vice versa. If you can see in its chart where the relative highs are, you might forecast a future drop in implied volatility or at least a reversion to the mean. Similar to its relative lows.
- In the process of selecting option strategies, expiration months or strike prices, you should gauge the impact that implied volatility has on these trading decisions to make better choices. This knowledge can help you avoid buying overpriced options and avoid selling underpriced ones. In fact, to be profitable, you need to be aware of the amount of implied volatility (IV) that each option traded carries.

This useful chart shows the suggest trade (buy or sell) for options (calls, puts, and spreads) according to its implied volatility (low, neutral or high), and the market direction (bear, neutral or bull). Use only as a reference, theory is more complex than this.

Determining if the IV of your stock is High or Low

In order to evaluate the implied volatility and considered at a high, medium or low level, traders should take into consideration some aspects:

- Overall Market Analysis: 
Analyze the VIX index to have a big picture of the implied volatility of the market as a whole. The "fear index" gauges the market's expectation over the next 30 days, and trends exactly the reverse of the SP500 SPX. A high VIX means a high volatile market, and so, a rise in the options' price. Compare this value with the IV of your particular stock, to consider it higher or lower than the VIX value.

- Implied Volatility of the Underlying Security Traded:
Compare the current IV to the past IV over a period of a year, to identify if it's in a relatively high or low range to the past. If IV is high, try to understand the reason: news, earnings, acquisition rumors, other events. Keep in mind that after the event occurs, the IV collapse and always reverse to the mean when it reaches extreme highs or lows. So, when you see options trading with high IV, or higher than typical, consider selling strategies. The opposite for lows IV.

- Relation between Implied and Historical Volatility:
Historical volatility (HV) is the volatility experienced by the underlying stock. So, in contrast to HV which looks at actual asset prices in the past, the IV looks ahead. Compare these two indicators over a period of a year, and in the same chart. There are three possible scenarios: 
IV > HV: options may be regarded as relatively expensive and it's convenient to sell.
IV < HV: options may be regarded as relatively cheap and it's convenient to buy.
IV = HV: options are not so expensive and not too cheap. You may either buy or sell options.
Finally, and no less important, traders need to complete its analysis comparing HV at this time with HV in the recent past. The HV chart can indicate whether current stock volatility is more or less than typically is. If current HV is higher than typical in the past, the stock is now "more volatile than normal". If the IV is low that didn't match this higher-than-normal volatility, the trader can capitalize on the disparity by buying options price cheap. Same on the contrary case.

- The implied Volatility Range
It's about to identify the IV trend, up or down, and its turning points. Usually can be considered cheap options those that are traded at the low of their IV range, priced at less than the volatility of the underlying. On the other side, can be considered expensive options those that are traded at the high of their range, priced at more than the volatility of the underlying security.

- The Effect of Time Decay
Generally, the value of IV become higher as options approach to expiration, its percentage change more quickly due to an increased degree of uncertainty. The fact is that this is directly related to the amount of time left on the option. So, the IV has a stronger impact on the price on long-term options due to the higher amount of time value left till expiration.

Knowing these basics of options and volatility, in the next "Trader Notes" I will analyze some ideas on how to trade the VIX indicator and play the market in these months of high volatility (VIX >20% is considered a volatile market).

Below Disney price is showed with its implied and historical volatility below in the same chart for a better comparison. As you see, today its IV=26.12% and HV=33.05%. The first thing I check is that its value is greater than the market VIX, currently at 22%, which is logical considering that DIS is a "value stock", which tend to have lower volatility than "growth stocks".
Its implied volatility reached highs in late December and then, as expected, reverse to the mean, and now is almost at its 50%, so it may be regarded as neutral. Finally, as its HV 
is higher than typical in the past, the stock is now "more volatile than normal". As its IV didn't match this, and also is in a downtrend toward lows, we have here a signal that its options are relatively cheap.
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Sunday, June 23, 2019

Ideas from my Stock Watchlist for this Week

Market Pulse.

Stocks climbed to new highs this week after the FED suggested it would give a Rate-Cut in as soon as next month, to keep the Trade War from stopping economic growth. The rally comes after trade tensions and uncertainty over FED policies worried investors last month, with stocks posting their worst May since 2010. Dovish feelings in the FED and a probable meeting between Trump and Xi during next G20 summit, helped share prices this month, putting the SP500 SPX on pace for its best June since 1955, and now testing a crucial resistance at 2,950 level. A consequence of the central bank decision is that US Treasury’s yields remain near multi-year lows: the 30-year yield TYX is near 2.6%, while the benchmark 10-year yield TNX is below 2%, the lowest level since 2016.

As usual, crude oil prices climb when geopolitical tensions increased. Now fears come due of a U.S. military attack on Iran after it was reported that Iran shot down an unmanned U.S. surveillance drone over the Strait of Hormuz.  Iran claimed that the drone was impeding on its territory. Oil futures /CL ended the week at $57.60 a barrel with a 6% up that day, the largest one-day rise since December.  Metal prices shot up since Thursday, lifted by FED decision affect a weaker dollar: Gold futures /GC gets its biggest one-day advance since June 2016 and its highest settle since 2013, overcoming the $1400 level. Definitively, gold is (one of) the best instrument for trading this month, through its popular ETFs like GLD, GDX or those at triple velocity JNUG, DUST, and NUGT.

Ideas for this Week

Next, some brief ideas and technical notes of stocks from my June watchlist, for this week, June 24 to 28th.

1. Cree CREE $57.15  
Its daily chart shows a stronger downtrend line (price touches it 4 times). This week again is approaching it, and a breakout could happen if market confirms its recent rally. Low Put/Call show a bullish sentiment of investors in this good company.
2. Dropbox DBX $25.01
Last Thursday its price breaks its downtrend line with heavy volume. Now it's overbought, and I will check if price retest this line, now support. As its implied volatility is low, seems a good moment to buy cheap options. The bullish sign could be the golden cross that is near to happen in its daily chart.
3. Fiserv FISV $91.48
Touches its resistance at $91.50, but clearly overbought. Recent outperform ratings by Wells Fargo and then Raymond James, with a price target of $110 and $103 force me to check carefully this stock this week.
4. Gilead Science GILD $69.38
Its price, ranging in a channel during all the year, last week breaks an important resistance, with confirmation include. Also overcomes its crucial SMA200 average. Good stock for options due to its low volatility. Only waiting for a pullback for entry long here.
5. PayPal PYPL $116.21
I'm paying attention to a bearish evening doji star candlestick in its daily chat, confirmed last Friday. In an amazing rally for 2 years, with a PE of 63, this stock needs a technical correction, probably a retest to $110 level.

A next golden cross (when SMA50 crossover the SMA200 average) will reinforce the bullish bias in Dropbox DBX after its recent breakout.

6. Atlassian TEAM $132.87
Same as Paypal, shows a bearish evening star in its daily chart, and its MACD decaying, signals some exhaustion in its long rally.
7. Twitter TWTR, $35.02
The level $35 is recurrent for this stock in the last two years. Its price does not finish taking off: always return to that level after up and down movements. A crossover below this level is forecast in the short-term due to its weak MACD, its recent removing accounts (that Wall Street dislikes), and also, Moffett Nathanson arguing that Twitter isn't spending enough to deal with the security issues that are plaguing tech giants, reiterating its sell rating.
8. Ulta Beauty ULTA $35.81
The cosmetic giant is again testing its all-time highs at $365, with a recent fine earnings report and some buy ratings along. Need to confirm its behavior at that level, probably rebounds on it or breakouts. In my radar.
9. VMWare VMW 173.39
I can´t understand why this stock falls after its decent Q1 earnings report in late May. It beats EPS and sales, maintaining its guidance for 2020, and confirm a$1.5B stock buyback. Partnerships with Amazon AMZN  and Dell DELL reinforced my bullish view in this company. Three analysts raised its price target versus one (Morgan Stanley) who cuts it. Technically form a double-bottom pattern at $165.60 level, rebounding now from his. VMWare looks like a bargain today for the long-term.
10. US Steel X, $14.67
What a difficult stock to trade! Due to its volatility and usual uncertain moves in the struggling steel sector, I only use this stock for day-trades, checking if have a strong pre-market move, that usually continues some hours during the regular session, for a quick profit. It's daily chart show a bearish engulfing candlestick, but last Barron bullish report views finally some good news in the steel sector. 

As you see in this weekly chart, the $35 level is critical for Twitter TWTR in the last two years. Good opportunity for traders after the stock decides where to move. Seems a bearish bias is more probable.

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Wednesday, June 12, 2019

Trader Notes: InterMarkets Analysis. Part 2

John Murphy

This post complements the previous one published a few days ago and aims to give a summarized idea of what intermarket analysis is about, study developed by John Murphy in his two classic books 'Intermarket Technical Analysis: Trading Strategies for the Global Stock, Bond, Commodity and Currency Markets '(1991) and' Intermarket Analysis: Profiting from Global Market Relationships '(2004). Although they may seem out of date because it does not deal with recent events such as the crisis of 2007, its reading is indispensable for a trader because it gives us a global vision and a better outlook when explaining in very detail the relationship between the four markets (currency, commodities, bond, stocks) and how they influence one another. This will allow us to establish our portfolio, telling us the best place to start investing in instruments for the medium and long term.

Inflation and Deflation

A basic idea of Murphy's book is to understand that the correlation between markets depends on the environment, which is stronger: inflationary (like the current one, with the general level of prices increasing), or deflationary (the opposite). Both extremes can be harmful to the economy: the first decreases the value of money over time, the other causes one to postpone his purchasing decisions ('I do not buy today, the next week will be cheaper'), situation which ends up increasing unemployment. The ideal is to maintain price stability, with a low and stable inflation, never close to zero, being the order of 2-3% the usual target.

Main correlations

There are several but I only summarize the main ones. In an inflationary environment, stocks and bonds move in the same direction, or have a positive correlation. The useful fact here is that bonds usually change direction before stocks. Another key correlation is the inverse between the dollar and the commodities, being the best known and used by the traders the inverse gold-dollar relationshipAgain, the useful fact for the trader here is that commodities usually change direction after stocks. As a complement, in inflation, a fall in i-rate drive up stocks (stimulate the economy, as in 2009-2016) and also bonds (lowers its yield, which is the inverse of the price).

The intermarkets relationships during deflation are largely the same in inflation, except for one: stocks and bonds have a inverse correlation.

In deflation, the fear of it moves the money from the stocks to the bonds, especially towards the safe Treasury Bonds that raise their price, lowering their yield. Observed that the relationship between stocks and bonds is here, inverse. What a central bank usually does as a solution is increase the i-rate to decrease the deflationary effect in the economy.

The charts are explained alone: the best hedges according to
the environment, inflationary and deflationary: gold and bonds, respectively.

Dollar vs. Commodities (or USA vs. China...)

It is understandable that when an economy strengthens and inflation begins to rise, commodities begin to have more demand and raise their priceThe main reason for the inverse relation between the dollar and the commodities is that this are quoted (exchanged) in dollars. When the price of the dollar falls, emerging markets importers will have more purchasing power and therefore, demand for these products will increase, which in turn will cause a rise in the prices of products. So, commodities have a positive relationship with stocks and i-rate, and inverse with bonds, both in inflationary or deflationary environment.

One of the best lessons of intermarket analysis: the inverse relationship between the dollar and commodities. This 2018, the crisis of emerging markets, very linked to commodities, is generating the strengthening of the dollar.

Remember, a strong dollar will always be a problem for a commodity, given that these are always traded with that currency, while a weak dollar is usually a stimulus for exporters and therefore for commodities. Thus, in 2015, China devalued intentionally its currency (falling its exchange rate through a rise of the dollar/yuan pair) to lower its exports (and make imports more expensive) and therefore accelerate its growth to the annual target of 7%. Since 25 years China lives with a trade balance in surplus (exports> impots), with reserves and a fixed exchange rate. 

In the USA, in 2017 the dollar remained under great pressure, as it was expressed Trump's intention to keep it weak in the short term as a government strategy, to favor exports and weaken imports. Totally different this 2018 with the dollar strengthening towards the long term with the beginning of the Trade War and the tax reform, as was the initial express wish of Mnuchin. Definitely successful Trump's strategy with the dollar, complicating all its global peers and emerging markets.

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Friday, May 24, 2019

Market Pulse through some of its Main Indicators

SP500 Index SPX, 2826.06

May, is always a difficult month for the stock market, and as I said in the previous post 'Sell in May and Go Away', the explanation of its recent fall is in the swings of the TradeWar, there is no more. It seems Wall Street discounted from January to May a "great" agreement between the US and China with the impressive rise of the SP500 (also thanks to stock buybacks, of course!) and now notice it will not be like that. Today, in moments of maximum tension, with the recent case of Huawei, the market seems to have opened its eyes not only to the complexity of this trade agreement but to assess the already many contradictory results in the US economy (for example, the recent very low ISM). Therefore, it's logical to presume that this correction should continue in next days or weeks. Current Trump's desperate last statements or tweets to bring the market up are notorious. He has done it before, let's see if he does it these days. That is the stupidity of today's market ...

Technically, the SPX made it difficult to overcome the strong resistance at 2,950 at the beginning of the month and its recoil is reaching the 23.6% of its Fibonacci, where it is forming a clear head and shoulder pattern with the last candle touching the neckline support. Its resolution will be key this week: if rebound it could enter to a clear ranging mode, with the possibility of overcoming the Kijun and the Ichimoku cloud in 2,874. If falls, its next support would be the powerful SMA200 in 2,777, and further down the 2,718 the 38.2% of its Fibonacci.

US 10-year Treasury Rate TNX, 2.32%

The TradeWar tensions and the indecisiveness of the market move investors taking refuge in the solid US Treasury Bonds, instead of other classic safe-haven instruments such as gold or Japanese yen. Today the benchmark US 10-year notes yield TNX has reached 2.3% the lowest since 2017, even below the 3-month Bill, which again revives the fears of a yield curve inversion.

Technically this indicator is moving in a bearish downtrend channel since January, being now in the lower line, prior to a resolution: could rebound to the channel or break this line and fall to levels of 2.2%. In the short-term, I see here a necessary correction upwards. To follow this week through the US T-Bond ETF TLT or triple speed 3X TLF (bullish) or TMV (bearish).

iShares Russell 2000 Index 
 IWM, $150.79 

The small caps, followed by the Russell 2000 IWM, generally suffer the swings of the market in a more marked degree, due to its greater volatility. Today, it's not exactly the best sector to invest in the middle of a Trade War but you can take advantage of its current ranging price for a swing trade. 

Since January it's moving orderly in a narrow horizontal channel between two clear support and resistance, $150 and $160 respectively, in which its main indicators are converged: SMA averages 50-100-200, and Ichimoku lines and cloud. Its ADX=18.6 (less than 20) confirms the range zone, and for these cases, the Stochastic is the best indicator. It's in 13.27, that is to say, very strong oversold, the reason why an upward rebound in the short-term can be expected. Mindful that its movement this week can correlate and influence other main indices such as the SP500 and Nasdaq.

SPDR Financial XLF ($26.86) and Technology XLK ($73.30) Funds

Some brief notes from the two most important industrial sectors of Wall Street: Financial XLF and Technology XLK, both unfavored in the current Sector Rotation, leading by the bearish Utilities sector XLU.

The Finance Sector can suffer more than any if the yield curve inverts. In addition to this, the crisis of certain major banks in the sector such as the Deutsche Bank DB (in historical lows) and a certain weakness of the Big Four, at the expense of Buffett and Berkshire, justify their bearish bias since April. Technically its weekly chart shows its price bordering his SMA50 and 100 averages, in neutral mode (yellow point in the last candle) according to the Elder Impulse System indicator. Take note that Friday rebounds in its SMA200 in its daily chart (not shown). FAS and FAZ, triple velocity ETFs of this sector, seems interesting to follow this week.

As for Technology, after its price forms an inverted V, since one month it's correcting very strongly due to the high tension in the Trade War, which has taken a decisive focus on technology. Trump and Xi know the importance of this sector, they know that who dominates the technology will become the number-one commercial world country. That is why the Huawei case is seen as only the beginning of a "Tech Cold War" that will not end even if both countries reach an agreement. Chinese reprisals against Apple AAPL are feared soon, which can deepen the XLV fall.

Both sectors find their price between the EMA exponential averages of 13 and 26 of their weekly chart, the "Value Zone" defined by Alexander Euler as the ideal moment to invest in a stock. Let's wait for some next news to predict a movement here. Now fundamentals are key here, more than technical analysis.

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Tuesday, May 14, 2019

Trader Notes: InterMarkets Analysis. Part 1


Surely it is known, but I think is a good topic to develop in two or three posts, briefly and colloquially, how I always try to do, the 'InterMarkets Analysis'. How it works, its importance, and the relationship among its instruments (stocks-bonds-currency-commodities), and how to take advantage of it for our trades, now that we are near another decision of the US Federal Reserve (FED) in November.

The Central Bank of each country (the FED in USA) control the interest rate, which has a direct impact on the value of the local currency. If they raise the interest rate, their currency tends to strengthen as investors look for high returns in their country for their short-term investments. If a government lowers the rate, it weakens its currency, since very few investors will be willing to lend their money to a country or its banks with a weak currency. Simple.

- A strong currency has a direct positive impact on stocks and bonds, since they pay more, but in turn generate inflation.
- The opposite occurs when the currency is weak: investors seek profitability in other regions and markets, and in commodities such as gold or oil, which rise in prices due to the increase in demand. In this environment, the yield of the bonds, which always accompanies the interest rate, falls and the price of bonds rises, due to the inverse relationship between the two. All these basic relations occur in an inflationary environment, in deflation some intermarket relations become inverse.

Include in one chart the four instruments (commodities, stocks, bonds, 
and currency) is the best way to understand the InterMarket Analysis.

How Central Banks work

I think the best way to explain it is with a real example: the Real Estate crisis of 2007 in the US. That time, during the crisis, the FED initiated a policy of economic stimulus, gradually lowering the interest rate to zero levels in order to 'warm the economy', and at the same time issuing currency to buy assets from banks (bonds issued by them) and generate liquidity in the market for low rate loans (this is called Quantitative Easing or QE). This generated the slow recovery of the economy and markets, and a progressive increase in the prices of commodities and services (i.e inflation), which today must be controlled, because in the short term it generates unemployment. That was the discussion (it's eternal) in the FED, which is the 'least bad' decision that must be taken: either keep invariable the i-rate for a while to take care jobs at the cost of a little inflation (dovish point of view), or on the contrary, prevent the rise in inflation, raising the interest rate above it, at the cost of some unemployment and stable prices (the hawkish).

As an important document for later analysis, here is the FED Funds Rate History since 1970, and its relationship with the Gross Domestic Product (GDP or PBI in spanish, publish quaterly) and Unemployment Data, issue the first day of every month.

The objective of Central Banks is always ensure that the i-rate exceeds the inflation data. During the Real Estate crisis was impossible to do, lowering it to zero levels, so as to heat a shattered economy.


To be continue...

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Saturday, May 4, 2019

Sell in May and Go Away? Depends on Trade War.

Market Pulse.

"Sell in May and Go Away" says the popular phrase, which is also a well-known adage in Wall Street. Last week the stock market closes in a moment of grace: the SP500 SPX in all-time highs and great numbers in economic events, especially the recent Employment data with great jobs numbers, with a 50-year record unemployment rate and flat average hourly earnings. That's the perfect combination for bull investors: the U.S. economy is strong and with growth without inflation. Also Wall Street is closing an amazing Q1 Earning SeasonThe only divergences are some market overbought signals (not critical yet) and the recent Powell speech, that Wall Street disliked, especially when he told that only a "persistently" low inflation would make the FED consider a rate cut. 

Finally, the Trade War is a separate chapter in this story: could finish (or not) with an agreement in the next weeks, nobody knows, probably neither Trump. As I always said, its resolution is key for the future rise (or drop) of the markets in the short-term.

Update: Today, May 5th. 

Trump in a tweet: Trump vows higher tariffs on Chinese goods.
Answer from Chinese: China considers skip trade talks.
Consequence: now, 22:40 EST, sell-off in world futures markets  SP500 /ES -2%,  Oil /CL -2.5%, DAX -2%, HangSeng -4%, VIX /VX +16%.

"Main15" Stock Watchlist for May

Some brief technical notes and forecasts of the stocks that make up my watchlist "Main15" for May. As usual, remember, they are NOT buying suggestions, only my personal ideas.

1. Cree CREE: after a successful earnings report, continue strong its bull rally, more than 10% in April. As it's trending, I'm only checking weakness signs in its MACD (and its financial news, of course) for taking profits and entry in the pullback. Great stock for all 2019.
2. Cognizant CTSH: its recent Q1 earnings report disappointed Wall Street traders, closing down 11% the session. It seems an entry short is the best play for the short-term.
3. Facebook FB: great performance in April, far overcoming all resistances, now going towards the $200, despite the usual uncertain news about its privacy and data management of its applications. His next resistance at $198, the 78.6% Fibonacci retracement of its fall since August.
4. Fiserv FISV: last weeks returns to its ranging channel between $82.5-87.5, due to its earnings report that beat EPS, flat guidance, but miss sales. I prefer to stay neutral in this stock, but checking carefully the level $87.50 for a possible breakout.
5. General Electric GE: trading now at $10.50, is again its an interesting stock for the short-term, as recently beats earnings and overcomes many resistances in April: the three daily SMA (50, 100 and 200), and the Ichimoku cloud. I'm long here.
6. Illumina ILMN: this health-sector stock came here from my Radar watchlist, after a good earnings report, beating EPS and sales, with flat guidance. Technically is now above all its daily SMA, touching the upper line of an important downtrend channel that could send this stock to $350 levels. Waiting for a more clear breakout: it's my entry signal.
7. Lennar LEN: Housing sector is recovering this year from a disappointing 2018, and Lennar is a key stock in this sector with its 35% YTD gain. Stock mainly for long-term investing, its next important resistance is in $54.68, the 50% Fibonacci retracement of its 2018 drop.
8. Netflix NFLX: the popular FAANG stock is now in my Main15 list due to its recent good earnings and nice world subscriptions numbers. Disney DIS new streaming service was a tough jab that I'm sure Netflix could assimilate well in the future, due to Hastings abilities. Now the stock is in a ranging channel $340-380 all the year, that yesterday overcomes. Probably a breakout is near here.
9. Paypal PYPL: same as in April, technically is unstoppable. One of the few stocks that did not suffer the market correction at the end of last year. Permanent member of my watchlist, I continue long here, with a tight stop loss now.
10. Roku ROKU: as an stock in a ranging phase (ADX<20) rebounding in a channel, it moves well according to the Stochastic indicator. I twitted that two weeks ago, for a nice rebound and next profit-taking. Today is near the upper line of its downtrend channel. I'm neutral, due to its huge volatility, waiting for signals and next Earnings Report.
11. Snapchat SNAP: as I remark always, it is a stock only for short-term speculation, never for a long investing. It's approaching its real valuation, I presume near $12-13. Probably recover to that levels in May due to upgrades because it slightly beats its recent earnings.
12. Atlassian TEAM: another stock winner, in my watchlist since January. I'm long here since it broke the psychological $100 level. Sank after its recent earnings but now is filling that gap, breaking its SMA50. Good pullback for an entry long.
13. Tesla TSLA: continue being the most hated (and the most loved) stock in Wall Street, due Elon Musk personality. Its fundamentals, news (as recent capital raise), and Musk tweets are key in its performance. Technically, the same as ROKU, is rebounding fine in a downtrend channel all 2019. Technical signs in MACD and Stochastic indicate some days in bullish bias.
14. Twitter TWTR: the bird breaks its 9-month resistance at $35, due to its good earnings report, and now the sky seems is the limit. Many bank upgrades confirm that. Long.
15. US Steel X: in April sank near 30% from $20 to lowest 2-year levels ($14.39) due to a Credit Suisse downgrade to $13 that make this a good stock for shorting it that month. Now, after an amazing earning report, it seems the gap could be filled in the next weeks. News of its new billion-dollar plant, a +17% day-recover and also an indirect Trump tweet are very good signals. Interesting stock if it increases volume because it usually takes off strongly.

Images were taken on May 4th, 14:25 EST 

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