Tuesday 5/4/10 Mid-Morning Update

It is obvious that the market and anything remotely supportive has cinder blocks tied to it's ankles. I do not believe that this is a break to fade at all and to stick to selling rallies as I believe this is just the initial move. It is difficult to continue selling the board lower on collapse days such as this, but I have a couple trades that I believe are just entering in-play territory and that could be ripe for entry now.

Buy Gold/Silver Ratio- Gold collapsed under the pressure of the market today and took out my stop placement area along with many others. However, Silver has ridden higher on Gold's coattails for a while now to levels that I believe were grossly higher than it should have been. Silver performs weaker along with the rest of the macro market on a break while Gold is used as a run to safety and holds higher under the same circumstances. To chart the Gold/ Silver enter (Gold - Silver/2). A bullish cup and handle pattern on the daily chart set off today at the 265.0 price level that projects to 290. Sitting near 270 right now I believe that you can enter on a slight break with minimal risk on a potential 4 or 5:1 risk reward trade. The execution ratio is 1:1 for the Gold and Silver on the trade as per the contract size it makes the ticks relatively equal volatility wise. This trade should work on continuation a lower for the macro market.

Sell Equities vs. Sell Fixed Incomes- The market's gut reaction when a substantial break occurs in Equities is to buy Fixed Incomes, but thus far today the Fixed Incomes, and Yen for that matter, have had a very underwhelming performance on the rally. With speculation that The Fed will unlock interest rates in the near future (or at least hint at it) the interest rate vehicles have had a very difficult time continuing to the top of their year long range and should drop in price as interest rates rise. This bearish pressure on the Fixed Income market does not allow it to rally in a correlated manner to the stock market, so with an equal ratio the unconventional idea of selling fixed incomes and selling equities as a relationship trade can be profitable and ripe for entry currently. There are so many variations on how to make this trade that listing ideas is almost useless for right now without further exploration, but if you are interested in working on the idea shoot me an email and I would be happy to do some tinkering.

On the Radar:

Sell Japanese Yen Calls- For a number of months I have waited for the right time to look at selling far out Yen Calls, but the window of opportunity that I was looking for was only open for a couple hours. On a monthly chart the Yen negated it's up-trend since the summer of '07 and now on a weekly chart has a cup and handle pattern below 106.79 that projects to 100.12. Looking at the weekly chart you will also see a number of spikes that occurred each time the market reached the 115 level. In late 2008/early 2009 the Japanese Government was confirmed on an intervention attempt to devalue their Currency to keep exports globally competitive. Although it is unconfirmed and pure speculation I have a few guesses at what caused the other spikes right around this level as well. This appears to be an artificial boundary on a market that has a confirmed bearish reversal now on the longer term chart. I was looking for a rally into the large low volume traded gap from 109.18 to 110.35 from March 24th, but it was only rallied into for a few brief hours. If the Yen is able to mount a moderate rally I am looking at the 114 &115 Calls near this artificial boundary as a tool to sell premium on the December contract and collect time decay to fund other trades. There is also a good opportunity here to roll the expiration price lower as a price decline continues. As the Yen is tied to the Fixed Income Markets on a reinvestment interest rate trade it should continue to decline on interest rate hikes.


Buy Bonds vs. Sell Five Year Note- Like the Yen trade I have had this on my radar for months as the monthly and weekly charts are now forming a confirmed reversal on the trend that has lasted since '07. To chart the market enter (Bonds*3 - Five Year*7). On the daily chart there is a large head and shoulders pattern that is formed by connecting the December 31st high to the March 19th high to create the breakout neckline value of -452.18 that was set off today. This is a trade that is based on the raising of interest rates and unwinding of the buy the short end versus sell the long end yield curve trade. This is a longer term trade because of the large formation, but the pattern has a projection to -443.21. Execution ratio for the spread is the same as the chart with Bonds 3: Fives 7. I would explore options strategies for the trade or look at just using a smaller position to hopefully sit with for the long-haul to capture the move.


Finally, stick with that short Copper trade if you still have it. Although it may not be the lowest thing on the board today on the gut reaction trade there is still an enormous amount of longs still out there holding a large losing position now. It should be pretty clear to them by now that Copper is not a good "buy the dip or recovery" trade and that 17% of the market is caught technically. I recommend using a long Gold position as a partial hedge as the stock market is obviously shaky right now if you are having difficulty or second thoughts about staying with it.