Monday, January 14, 2019

Important FED Speaks this week

A Hawk and a Dove.

A preamble:hawk, in monetary policy, is generally in favor of higher interest rates and less stimulus. He believes that inflation is already high and he needs to adjust the monetary policy to avoid it, even at the expense of unemployment, and thus maintain stable prices. dove is quite the opposite: it prefers to maintain or reduce rates and favors more stimulus because he fears the high rate of unemployment and does not believe that the current inflation rate is high enough to worry about. 

FED Board of Governors

The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the FED. It is charged with overseeing the Federal Reserve Banks and with helping implement the monetary policy of the United States. The Republican Jerome Powell is the current Chairman. The other 15 current members of the Board of Governors, and mainly its position (hawkish, dovish or neutral) are as following:

This year the voting members are Bullard, Brainard, Powell, Bowman, Quarles, Clarida, Evans, Williams, Rosengren and George. Meaning more hawks (4) than doves (1), with 5 neutrals. Next years voting members change.

And this week, the FED Speaks

The Fed communicates through speeches, press releases and testimony to Congress. Each event is analyzed as to any indication of a change in policy. Even the smallest change in a phrase, including a single word, can impact the markets. And this week a number of FED speeches will get market attention, as investors watch for further clues on interest rates.

In 2018 the FED speaks (and the FOMC statements) were not so attractive for traders because the decisions in monetary policy of the FED had almost no discussion: necessarily had to do several rate hikes in an economy that was beginning to take off. This year promises to be completely different because the hikes have reached a limit (2.25-2.5% is the current federal funds rate) and to do more with a stagnant inflation (less than 2%) can be dangerous and even recessive. The debates among the analysts about the optimal number of rate hikes for 2019, and in the other hand the federal funds futures /ZQ betting today that there will be no hikes this year, make very attractive what can happen this week that there are several member speechs, according to the calendar shown below, in bold.

When the Fed member indicates that there will be an expansion in monetary policy, it is a positive sign for stock prices in the future, and a buy signal for many traders, because a growing economy will increase revenues and the value of publicly-traded companies. If the Fed indicates contraction in the monetary policy, which means it is trying to get the economy to slow down, it is a negative sign for future equity prices, as business growth will likely slow in the near term.

My tip for days of FED Speaks to take advantage in our trades: the market follows little to the members of neutral tendency, so be attentive to the following: see if some connoted dovish member makes a slightly hawkish speech, or vice versa. That is to say, the unexpected. That moves quickly the market in one direction, bullish or bearish, as the case may be. Quick profits there, mainly trading the volatility VXX or UVXY. So, watch out carefully for Neel Kashkari, Esther George, and John Williams this week.

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Friday, January 11, 2019

Watchlist Update: Market Pulse, Sectors, NFLX

Market Pulse.

The apparent (and unclear) advances in the definition of the Trade War and a "new" FED, decidedly dovish, are sufficient arguments for Wall Street to continue resurging since its pullback at the end of 2018. The stock market seems not interested in the worrying 3-week shutdown of the US government, nor the economic slowdown of China and Europe (all its macro data of Industrial Production very bad this week): the SP500 SPX closes this week with a 2.5% advance, in its best 10-day rally in a decade. The oversold market in late December was already very strong and it was expected to reach important support (in this case its simple moving average SMA200 of weekly chart, shown two weeks ago, here) for the rebound to begin.

The "buy the dip" trades have been strong, so much that the market sentiment, measured by the American Asociation of individual Investors, with a bearish survey in December, now moved strongly to bullish sentiment, in line with its historical average. This week, the beginning of bank earnings (Citigroup C, Wells Fargo WFC, Goldman Sachs GS, JP Morgan JPM and Bank of America BAC) can serve as a guide to see if this new-year rally continues, on purpose, very usual in January, characterized by the low volume of transactions and rebalancing of portfolios.

The question is if this heavy rebound is consistent or is a single dead-cat-bounce of several days, part of a large fall. The answer, I repeat, will be given by the final resolution of the Trade War, there is no more. All the rest is speculation and particular interests that move the stock market upwards. But, it is precisely in these periods where a trader can obtain better benefits taking advantage of the high volatility and indecision of the market. Past are the months of November and December where I recommended to leave long positions: today (I believe in all January, have some doubts in February and March) the picture looks different. It seems we were in a "recovery mode", but we must always be very careful, it's not a return to a bullish bias. 

My contribution: I'm venturing some long positions in solid companies (as Netflix NFLX), probably for weeks, with a very tight stop loss. And this 2019 follow the value stocks, companies that earn high dividends with low P/E. In sectors, pay attention to the defensives as Health XLV and Staples XLP. I include some interesting companies of that sector in my last watchlist.  Finally, let's review some basic technical analysis of the key charts of the markets (SP500, Crude Oil, US Dollar, and the 10-year T-Bond yield), for this week.

- SP500 SPX: the daily chart shows its strong rebound that made it arrive, in only two weeks, at 38.2% of its Fibonacci, today turned into support, and goes for more: its next resistance is his key SMA50 that almost coincides with 50% of the Fibonacci. The fundamentals described above will be decisive in its behavior the next sessions.

- Crude Oil /CL: in rebound from the first session of the year, already exceeding the very important level of $50, today support. Aided by a data of low inventories at midweek and optimism for a US-China agreement that would raise its demand, Crude Oil is heading towards 38.2% of its Fibonacci at $55, with some resistance at its average SMA50 these last two sessions.

- US Dollar /DX ($DXY): I see it better on a 20-minute chart as it is quite volatile. This week is oscillating between the three main moving averages 50,100 and 200, but still above its Ichimoku cloud. It can lose strength in these days with the data of inflation decreasing, and the always latent risk of recession in the economy. But, 
on the other hand, main bank earnings and economic data that come this week (IP, Retail Sales, Housing) can give dollar, momentum if they come out positive.

- The 10-year US Treasury Bond yield TNX: in the monthly candle chart shown, it is very clear how powerful is the resistance of $3. Psychological, too. It could not overcome it and comes down to the 2.7% level, flattening the yield curve since December, with the risk of a recession that this brings. its bad reaction to Powell's speech was as expected, the same as the decreasing inflation data on Friday. Seems it could continue its bearish behavior. Do not forget the permanent reading of this index, a true gauge of the market.

The three "defensive" Sectors continue leading

This comparison chart shows the performance of the nine main sectors during 2018 and the first weeks of 2019. Show in blue sky is the SPX. As you see, the three default defensive sectors (Staples XLP, Health XLV, and Utilities XLU) continue leading this stock market. But if you compare with the last sector rotation chart I post here a month ago, the gap between sectors is tightening, signaling a probable change in the stock market bias. Also, the Sector Rotation Model, above in red, is now in -4.51 form the previous -7.51, another signal that the bullish traders should take note.

Netflix NFLX, $337.59

Monster rally in Netflix NFLX since the "Birdbox" phenomenon and its recent victory in the Golden Globe Awards: in only one week overcomes its three main moving averages and Ichimoku cloud. The MACD bullish divergence (yellow lines) is complete only when is confirmed by its EMA13 (in the yellow circle), and works fine during this week. Next level at $350, near its 61.8% of Fibonacci retracement. I'm long this week, despite its very overbought and its earnings on Monday.

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Wednesday, January 9, 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.

The Options

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 its implied and historical volatility in the same chart. 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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Monday, January 7, 2019

Watchlist Update: CTSH, CREE, GE, ROKU

In a market that is too unstable for trading, different to what we are used to in Wall Street, intelligent alternatives are the day or swing trades: short, powerful and effective, to avoid the market volatility. In these cases, it's enough a basic technical analysis (that is, moving averages, support and resistance levels, Ichimoku clouds, trendlines, volume, candlesticks) to forecast stock movement, with certain success.  Let's see some stocks of my January watchlist, ideal for short-term trades.

Cognizant Technology Solutions CTSH, $63.54

In its 10-minutes chart its clear that CTSH price has many sessions trying to pass the $63.90 level, that is turned now in a powerful short-term resistance. I put an alert in that level, and wait until price breakout this level for applying a day-trading strategy, for example, the ADX-Ichimoku, explain here.

Cree CREE, $42.58

In my main watchlist since October, CREE today overcome moving averages 50 and 100, and Ichimoku cloud. Technically, next level SMA200 and more volume are my signs for entry long. An agreement today with ST Microelectronics, on multi-year silicon carbide wafer supply can help next days in its bullish trend. Long.

General Electric GE, $8.61

After a catastrophic 2018 that took its price to historical minima, GE began a strong upward correction (almost 25% since the end of December), surpassing today (+ 6%) its SMA50 and approaching the Ichimoku cloud. Good news helps today:  reports of a buyout of its GE Capital Aviation Services unit by Apollo Global Management. The sale of the business would allow the company to deal with its ballooning debt load, a key to maintaining the company's much-protected, although diminished, dividend and preventing a junk credit rating. Long.

Roku ROKU, $42.50

I'm long in ROKU since my tweet of January 2th. in which I believe it outlines as an alternative to Netflix. Today skyrockets +25% on news that for its fourth quarter, its active accounts and streaming hours on its platform were up 40% and 68% year over year, respectively. Technically, it's overcoming the SMA50, approaching next level in SMA200 and Ichimoku cloud, a probable exit. Due to its high volatility, I use here a tight stop loss in my trades. Long.
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Wednesday, January 2, 2019

Next critical levels for the SP500

US Economy 2018 in a minute-reading.

- The economy started the year very solid, with the momentum that came from 2017.
- With the start of the Trade War (US tariffs on Chinese imports especially, and subsequent similar response of the Chinese), industrial production and international trade began to fall. The doubts began.
- The Tax Reform, the increase in fiscal spending and the repurchase of shares allowed Wall Street and the economy to continue growing. In this sense, the FED applied the expected Rate Hikes, which reinforced the dollar against its global peers. The most vulnerable emerging markets felt this new blow.
- At the end of the year, the worsening of the Trade War, the global deceleration and distrust of investors, passed the bill to both the economy and the markets, added to a necessary technical correction in the stock markets. The word recession begins to sound strong.
- The resolution (if it happens or not) of the Trade War will determine the economic direction for 2019.

The million-dollar-question in Wall Street

The "million-dollar-question" that all the traders and investors in Wall Street made today, is what will happen the next days and weeks with the index SP500 SPX, the benchmark of the market, today in the level 2,500.

As usual, there are two components in the analysis: the fundamental and the technical, in proportion 50-50. In this case, the fundamental aspect is the one that will determine the direction of the movement, bullish or bearish, and the news and advances in the resolution of the Trade War will be its main component, there is no other factor more powerful than that. If a favorable agreement is presented to both, US and China, and Wall Street likes it, the SPX index (and all the markets without exception), will skyrocket. Otherwise, bad news and the fall can be devastating. In both cases, you will always find important levels to overcome, be they supports or resistance. Let look this in the charts, both long and short term.

In this daily chart of the SPX we can see the short-term levels. After the rebound of the last week of the year from the SMA200 level of its weekly chart (not shown here, but explained in this previous link), the price is today testing two days ago its first resistance: the level 23.6% of its Fibonacci drawn from its top of 2018, in September. This first resistance seems able to overcome it without problems because of the impulse that the price has been carrying. Then it will face two more important resistance: the 38.2% of the Fibonacci indicated and the resistance level (before support) in 2,550 (yellow line), which was its minimum of 2018. Overcoming both would be key to thinking about a serious recovery of the index. It would, therefore, be routed to the SMA200 key and to the lower level of the Ichimoku cloud, or the beginning of a new bull market.

In the monthly chart of the SPX you can analyze what can happen in the long-term. For this, it's vital to draw a Fibonacci of all its rise from its minimum in 2008, after the housing crisis. As you can see, the price is currently struggling with the level 23.6% of its fall, always below the decisive level SMA10 (the black line), which indicated me the entry to a deep correction in December, predicted here. Following the current rebound, and only with the help of the fundamentals mentioned above, the index can overcome its SMA10 and allow it to return to its maximum because there are no long-term important resistances nearby, only the short-term mentioned above. If the opposite occurs and the index begins to fall, it would face at level 2,300 the multi-year uptrendline (in yellow), strong support since 2008, perhaps the most difficult to beat down, which would be decisive to presage the future of the market. Getting below it would indicate the dreaded deepening of the bear market.

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