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Tuesday, February 7, 2023

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Turning $10,000 into $50,000 by January 21st (Members Only)

We're halfway to goal – let's see if we can double up in two months!  

We began this virtual portfolio on June 11th and we ran $10,000 to $26,000 by October 4th, when I decided the risks of playing with our 160% profit in what was getting to be a very choppy market outweighed the potential reward of doubling up again.  Two months later, I'm not entirely sure I've changed my mind but we've had so many nice, short-term opportunities lately and we've been doing so many short-term, focused trades as we try to keep to cash that I thought this would be an ideal time to sharpen our short-term trading skills and spend time focusing on trades we can all follow and learn from.  

The idea of these picks was to find $10,000 worth of small plays that we thought could gain 500% by Jan 21st as part of a larger virtual portfolio. If you can do this with just 10% of a $100K virtual portfolio or 5% of a $200K virtual portfolio, that’s plenty of risk for these uncertain times and it’s a nice 25-50% bonus on the entire virtual portfolio if it works out. Risk can be a component of a conservative virtual portfolio if we wall it off safely.  We wanted to increase our shopping budget for Christmas and, while 5x would have been nice, 2.5x in the hand beats 5x in the bush – always keep that in mind as we try to turn $25K into $50K.

What kind of trades were successful last time?  It wasn't really directional trades so much as opportunities, like grabbing BP on the cheap and, of course, our lovely artificial buy/writes like C, which was one of our surviving spreads and should finish off at the December goal of 1,150% profit.  Of course we had a better VIX then – we were in the 30s in June and it's not as simple to make money by just selling options at VIX 22 but it's better than 18, where we've been since early October and that's one of the reasons I lost my taste for this Virtual Portfolio – too much risk and not enough reward with the low VIX!  

The lower VIX is a also why we've been taking more directional plays in Member Chat.  If it's a bad time to sell premium, then it's a better (it's never good) time to buy it.  I tend to look at premiums like an appraiser – there are cheap ones and expensive ones and if something is too cheap to sell (always our preference), then maybe we should consider buying it.  Of course I'm expecting the market to dip and the VIX to pop so a very good time to consider getting back into the premium selling business that we love so much.  Before we begin, let's take a giant step back and look at the big picture on the S&P chart:

See folks, this is not rocket science.  I have a 5% rule, Fibonacci has a regression series and they both say the 50% line (1,200) is a BIG DEAL on the S&P and they both say, more or less, that the 40% and 60% lines (20% moves off 50%) are also BIG DEALs and, as Captain Kirk so often tells us – you can't argue with the Big Deal.  Oh, in case some of you are wondering, this is a WEEKLY chart.  Each one of these little ticks represents 10,080 of the 1-minute ticks you folks usually look at.  When you look at the BIG PICTURE, you can see how well behaved the S&P actually is in it's little channels.  For some reason, the Fib tool won't do 1,600 so that's why those numbers are a bit off but you get the idea, we are getting perfectly normal market behavior and you can see by those 6 red circles that this is probably not a good time to bet long.  

Notice that the 5% rule dictates we can expect a 20% "weak bounce" (sometimes called a dead cat bounce) off significant moves.  "Significant" then depends on your time-frame and here it is years.  We can see a move WAS significant after the fact but that doesn't do us a hell of a lot of good in our betting, does it?  So we use the 5% rule to ANTICIPATE what is LIKELY to be the termination of a move and that is, of course, 5%, 10%, 20%, 40% and 50% so those are our "pivot points" and we expect more and more resistance as we move up the scale.  As you can see on the chart, that 40% line gets particularly heavy as Fibonacci sets in at 38.2% and enough people do TA with Fibonacci that it's very hard to cross it without seeing some resistance selling (or buying, as the case may be).  

The "art" of the 5% rule is learning to ignore spikes.  That's VERY hard to do while a move is in progress and that's the sort of thing I was doing early this month as I felt we were in a spike, even though we were breaking our levels.  My logic was based on the dollar being at 75.6 at the time as well as the Fed's POMO announcement.  Since those were clearly both additional upward thrust for the market, I was less impressed by the move over our levels.  Also, note the volume wasn't too exciting either.  You don't want to have red flags like that while you are making new highs… 

That's another reason I'm not impressed with the overall move so far, we have a 50% retrace of our drop from the top but the Dollar has dropped 10% during that time so we kind of need to move the S&P down 10% to compensate and that puts us move along the 40% line than the 50% line and that can indicate a failure to recover, especially as we are double topping (possibly) right here.  If everything goes well: If we don't have an Oil Crisis or Food Inflation or a China Meltdown or a Euro Default or a poor shopping season or anymore US Financial Meltdowns – then I think we can drift along between those 40 and 60% lines and maybe head higher if we clear another year.  If, on the other hand, pretty much any of those things go wrong – it's a very easy ledge to shove the markets over

Inflation is the other wild card.  A falling Dollar can move us towards that 60% line and, once we get over that, it's a clear shot to 100% but that's a BIG move and, in the grand scheme of things, we won't miss much if we play it cautiously until we confirm the 60% line vs. how screwed we can be if we're over-invested in a rally and have another dip like Sept '08 where it was, if you remember, not all that easy to liquidate quickly without taking some big losses.  

That's all my cash call boils down to – playing it safe in uncertain times.  I waiting until I thought the Dollar was bottoming at which point cash (being US Dollars) became a valid investment premise and here we are, with the Dollar up 9% from my cash call so, boring though it may be – sitting on the sidelines has been profitable.  They said I was crazy when I made the UUP call back then and I wrote that Dollar 88 is a possibility (up another 10% from here) yesterday and I've already been getting hate mail on that but check out the weekly dollar chart:

Now I'm not TA guy but dollar bears should be VERY concerned if we break up here as conditions are ripe for a big run.  The EU did get their act together and put up a $90Bn bailout, which may be enough to stop the Ireland slide and they've made provisions for additional bailouts for Portugal, Spain etc. should they become necessary.  Will this be enough to really calm Europe down or will analysts immediately say it's still not enough?  

We'll have to play things by ear as we look at the market reaction this week so don't expect a bunch of plays for this Virtual Portfolio right out of the box.  We still could very much go violently in either direction and we'll just be looking for opportunities in Member Chat this week.  Japan is very happy to get the Yen down to 84 to the Dollar but that will be another wild-card this week as a weaker dollar will worry Japan.  At least some of gold's $1,360 is based on EU fears so it will be interesting to see how it behaves this week if those fears are cast aside.  

No immediate trades on the 1050 Virtual Portfolio then as we'll have to watch and wait for a good opportunity – it would suck if the markets picked now to calm down as calm with a low VIX is NOT the environment we want to try to double up in.  Our financials are still beaten down and that's where I'll be looking first for opportunities.  One trade I'm looking at is BAC, which one would hope can hold $11 so selling 10 Jan $11 puts for .62 ($620) and buying 20 Jan $11/12.50 bull call spreads for net .54 is net .25 ($500) with $3K of potential upside at $12.50.  BAC is a mess and I have to think about whether the risk is worth it but that's the kind of trades we want to look for if the markets are turning positive again.  

 

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