"When I get to the bottom I go back to the top of the slide
Where I stop and I turn and I go for a ride
Till I get to the bottom and I see you again" – Beatles
If you think you have deja vu, you are right. The title of our Wednesday post two weeks ago was "Wednesday Weakness: Controlled Descent or Helter Skelter?" and we predicted the recent movement, saying:
Just as the path of the Helter Skelter is predictable, so is the eventual unwinding of a market rally and, no matter how much QE you pump into it, things do come down eventually. Only when you build on the base are you able to raise the bottom of the slide. Otherwise, no matter how high you climb – you will see that bottom again.
And so, exactly two weeks later, we are back to the bottom of the slide and just as likely to go back to the top where we'll stop and we'll turn and we'll go for another ride until we get to the bottom and we do it again – yeah, yeah, yeah!
There's nothing wrong with a repetitive market pattern, we're doing fantastically well getting in and out of futures plays and, as I noted that Wednesday, there are plenty of stocks we do like and we're doing plenty of bottom-fishing along the way because, while we're looking for a market correction in the short-term, in the long run we're pretty bullish. Meanwhile, we're simply looking for the same Futures bounce lines we outlined at the time to confirm a real recovery:
- Dow (/YM) 18,075 (weak) and 18,150 (strong)
- S&P (/ES) 2,134 (weak) and 2,140 (strong)
- Nasdaq (/NQ) 4,820 (weak) and 4,840 (strong)
- Russell (/TF) 1,226 (weak) and 1,232 (strong)
- Nikkei (/NKD) 16,900 (weak) and 16,950 (strong)
Obviously, not making our weak bounce lines on 3 of the 4 US indexes is BAD. A strong Dollar (up 1%) since 10/12 is boosting the Nikkei a bit and we'll see if Apple's (AAPL) earnings disappointment drops the Nasdaq back under the strong bounce line – that would be bad too. I'm not going to be the 1,000th person to talk about AAPL's earnings – they were fine, it's way undervalued – move along…
As we called it for you yesterday (you're welcome), the Dollar topped out at 99 and is now pulling back 0.5% (so far) and that, of course, is boosting the markets and boosting oil though you wouldn't know it from the actual action as we're still down into the open but the dramatic drop in the Dollar is a hell of a boost if it goes under 98.50.
With oil at $49.10, it actually makes a good long now or, even better, just play Brent Crude (/BZ) over the $50 line with tight stops below but I'd take quick money and run ahead of US inventories (10:30) because a strong build (5Mb+) is likely to send us back down. Still, even a 0.25 run is good for $250 per contract, and that's enough to treat ourselves to an Egg McMuffin, which is all we aim for in early Futures trading.
Speaking of which, we have a Live Trading Webinar at 1pm, EST today – open to our Philstockworld Members and Options Opportunity Portfolio Members over at Seeking Alpha – we'll be doing some fun Futures trading there as well.
That Wednesday, in our Webinar (replay available here), we were shorting oil at $51 and now $49 is up $2,000 per contract in two weeks. We also discussed (in the morning post as well) shorting the Oil ETF (USO) as well as Chevron (CVX), both of which are working out well already. Our short play for the Dow (DIA) was to use the 2x Ultra-Short ETF (DXD) and our trade idea was:
The 2X Dow ultra-short (DXD) is a fun play at $17 and a 10% drop in the Dow would kick it up 20% over $20 so the January $16 ($1.40)/20 (0.30) bull call spread at net $1.10 offers you nice protection ($4 back at $20 for a 263% profit) into the holidays and the only way you can lose is if the Dow goes higher because it's currently in the money. So, if you expect to make $10,000 in a flat or up market with your bullish positions, you can take $3,300 and buy 30 of these hedges and that will pay you up to $12,000 back if the market turns sour. If not – then a percentage of your gains goes towards the insurance.
DXD is still at $17.05 but the spread is now net $1.60 ($2.05/0.45) because our option selection system is brilliant and lets you make money in flat markets, but that's besides the point, which is you need hedges like this to ride out potential downturns. In fact, part two of that trade idea was:
Of course we offset that potential loss by selling puts on something we REALLY want to own if it goes on sale. For instance, this morning I pointed out to our Members that our old favorite, Lumber Liquidators (LL) is still paying $1.40 for the Jan $17 puts, which nets you into the stock ($18.83) for $15.60 – a 24% discount. If you pair the sale of those puts (15)with the spread, you drop your net to $1,100 on the spread and you have an obligation to own 1,500 shares of LL at $17 ($25,500) if it heads lower – so just make sure it's a stock you REALLY want to own.
Even though LL is going nowhere, the time decay on the short puts we sold has caused them to drop to $1.10 so now the net of the trade, which used $1,100 in cash to initiate, is now 30 contract x $1.60 = $4,800 minus 15 contracts x $1.10 = $1,650 is $3,150 so a gain of $2,050 (186%) in two weeks on an insurance hedge we didn't even need (yet). Not bad, right?
People think I use these examples to brag but I am trying to TEACH you that this is a system that works, just like a math teacher will keep going over the multiplication tables until you begin to believe that math works. This system is NOT gambling – it is math – the more examples we show you, hopefully, the sooner you will learn how to STOP gambling and BE THE HOUSE!
The max payout on the above trade is $12,000 and the spread is only net $3,150 now so there's still $8,850 of potential additional upside (280%) between now and January and I still like the hedge – just not as much as I did two weeks ago! Still, if you aren't protecting yourself from the danger of an extended sell-off – PLEASE consider one of our hedges. Better to give up a little profit on the way up than lose all your profits on the way down, right?
Speaking of trade ideas that are getting away fast, we've been banging the table on Coffee (JO), (/KC) for ages and our premise has been that climate change is wreaking havoc with Global coffee crops and we got the first good evidence of that yesterday as Brazillian exports of Arabica coffee are more than 10% below forecast.
I won't even discuss how thrilled we are with this chart as Coffee Futures (/KC) pay $375 for each penny move in our direction and JO is up more than 20% since I called Coffee the front-runner for our Trade of the Year for 2017 but it's still 2016 and you ain't seen nothing yet as crop forecasters at Philstockworld are now predicting a 20% drop in Vietnam's Robusta output so we're taking 200, which is another 35 x $375 = $13,125 PER CONTRACT up from here and, of course, we have those fancy options spreads to leverage our position in JO in our Members Only Portfolios.
Don't subscribe, we'll probably share some trade ideas for free in the morning post one of these days. After all, what could you possibly miss?
