Options Trading Blog
Options Trading Tips and Strategies
Shipping stocks were some of the most unloved companies in 2011 but so far in 2012, they have shown some incredible strength. Diana Shipping (DSX) is currently sitting above its 200-dma for the first time in over two years. The stock closed up 7.30% to $9.53 today. It rallied off of DryShips’ (DRYS) earnings that were announced in pre-market today. DRYS has been on an absolute tear lately and has been up 7 days in a row. It closed up 11.33% today to $3.34. The stock is up over 55% so far this year. It appears that $135.60 is a tough level for the SPY to break through and has shown resistance here on 2/9 and today.
To be honest I have been too busy with getting our trading room ready to launch to sit down and really analyze the chart.
The first few points I want to summarize are.
1. Yes, we are going parabolic.
2. No this does not mean that we will crash (at least for the near term)
3. Is AAPL Going to 1000? No My final Target is 700 and I will tell you how I got that number.
1. Basic analysis of distance traveled on the y axis (price) vs. distance traveled on the x axis time simply shows that AAPl is going parabolic. No rebuttle.
2. In the below chart I have labeled the elliot wave count “of best fit” . This is concluded because the move in 07-09 as seen on the monthly chart is a clear cut A-B-C retracment wave. Additionally the current move we are in is longer and more “impulsive” than the prior 1 wave, thus concluding we are probably in wave 3. So were to next?
3. Just to touch on the volume aspect lets note the bottom of the chart and see that the Wave 1 was accompanied with rising volume. I see this as passengers boarding the train for the long ride. This is very typical of strong uptrends. There also was exterely high capitulation volume at 2009 sell off. This is to me as a “shaking out” of the weak hands. So in the midst of chaos the weak handed investors / traders sold the stock only to be, in my view chasing it and buying it much much higher. The key thing I want to point out next is that the move from 2009 to as of now is accompanied with flat or somewhat deacreasing volume. This is “unconfirming” of the trend but doesnt mean that AAPL couldnt go a lot higher. All it is telling me is that all the people that sold out or didnt ride AAPl previous to now will be rushing to buy it and creating the “final top” where there will be a large spike in volume and at very high price levels with a highly volatile messy topping pattern. Till then lets dig deeper to some current key points.
Trend Line Support : I have drawn the two Key support lines the steeper of the two will be the most relavent for the next few years going forward. The more obtuse lower line will come into play when AAPL bubble does finally pop and this will be the primary support line it could use for the “crash support.”
Some key elliot wave aspects I want to point out are the fibonacci concfluence and projected levels. I have drawn a basic fibonacci overlay that displays the most relevent levels as per the fibonacci sequence. With the entire price action of the 07 – 09 retracement staying within the 38.2%, 23.6% and 14.6% levels I would expect that the rest of the move will also react at the projected levels above. We just brokeout of the 78.6% at 400, and currenly would be sitting at 100% here at 500.
Thus, puting expected possible projections up at the 123.6% and 138.2% are considered “of good fit”.
Elliot Wave Perspectives
Wave Count:I previously went over the basic count that I think we are in which is 3 of 5. (5 being the peak final high). Since we are not showing any signs of slowing here at 500 I would suspect that we will reach the next significant level of 123.6% at 620.00 before the current wave 3 ends. This level I think will be a major high for some time following, but not the final high. This is because wave 4s are typically drawn out and longer induration to wave 2s.
Time Symetry: Since wave 2 was approx 716 days top to bottom (which is curiously a Gann Root of 144 reciprocal) I would project the wave 4 to draw out no less than the duration of wave 2. Since 720 is the closest real gann reciprical I would expect to see a sideways triangle, complex retracment or broadening pattern form in the range of 620 to 500 for no less than 716 trading days. Since the next reciprical of 144 above 720 is 864, I will be counting days from the major high of wave 3 to zone in on a possilbe date of wave 4 ending its consolidation, 864 being my primary day count. The box I display in the 620 – 500 range is approx the amount of time (calendar) days it will take to complete this retracment.
Rule of Alternation: The rule of alternation says that if Wave 2 is steep and sharp in nature then wave 4 will be long, drawn out and complex. Knowing this a trader could adjust his strategy from ‘breakouts’ to playing ranges and selling movement (selling straddles or condors would fit this strategy). In the next chart I have over layed the Gann Angles that would come into play for places to possibly find support.
AAPL Final Target 700.
So how did I get that number? Using the same techniques as I have been discussing in this article I have the 138.2% projection slighly below 700.00, but this is not enought on its own to finalize my viewpoint that 700 will be the final top for aapl. using measured move technique I measure the move from the lowest low before wave 1, (which happen sometime in 2002) to the top of wave 1. Then I use that length from the bottom of what I think will be the bottom of the wave 4 range (500) to get also a number close to 700. I expect a high flurry of volume up there when people who didnt ride AAPL up this matterhorn ride finally throw in the towel and buy, This will also be evident because stories of hedge funds “blowing out” from being short AAPL will be rampant.
In summary, I always remember that “if it looks like a duck, quacks like a duck, it probably is not a chicken” AAPL, to me looks like a bubble, BUT! only in the teenage years of one. It still has much more ground to cover before it comes free falling back to earth. No I dont think AAPL is going out of business and Yes I think it is a great company with a great product. I am not trying to make a case for AAPL being a bad company. I am in the business of analyzing the stock price and projecting its next course of action to the best of my ability. So thats what I do. If you have any questions about his article email me at : [email protected]
Should this rally be sold into? We need some selling pressure to relieve overbought conditions in my opinion.
We saw some unusual option activity in a few names:
– One customer bought 9800 HSNI March 35 Calls for $2.10, those Calls are $2.30 now (185 times usual volume)
– customer bought 9577 LYV April 10 Puts for $.70, (21 times usual volume) in the Jeremy Lin fade as Live Nation is the biggest competition to Madison Square Garden. MSG is up around 12% in the last week. Is MSG overvalued? Is Lin the new NY savior?
These behemoths, whose word is almost holy to bond investors, grossly overrated bundled mortgages (CMO’s) and other questionable products. They checked their integrity at the door in order to invite in more business, and they have never regained their prior creditability and reliance. That is, until now. Over the last few months, rating agencies have taken on the world in order to rebuild their creditability. First, S&P downgraded US Treasuries below AAA, an almost unthinkable action in years past. President Obama did everything possible to discourage this action, as did Secretary Geithner. Yet S&P took on “the man”, and did the downgrade. The ratings agencies also downgraded France below AAA, and downgraded a number of other European countries and banks. Many American banks have also been downgraded. In sum, downgrades have been about as common as high priced commercials in the Super Bowl. One security downgraded with impunity has been the bundled CMO’s. Some CMO’s rated AAA on 2008 are now rated CCC or lower. Various other securities have been equally harshly downgraded. Indeed, the ratings agencies seem to have drunk the cool aid. They have a new morality in trying to accurately rate fixed income investments. More importantly, this new morality will play a major role as the current Greek tragedy enters its final act.
Here’s where Greece’s private bondholders stand now: A deal is on the table where they would take a 70% haircut by exchanging their old bonds for new ones. If all bondholders agree to this deal, there will not be a “default” on Greek government bonds. However, if some bondholders do not agree to the deal, they will likely be forced into it by Greek legislative action or otherwise. This forced action could well be deemed a “default” on the bonds. As such, it would give effect to credit default swaps written on the Greek bonds. And once this occurs, nobody can accurately predict the interbank and other ramifications that could possibly threaten the world financial system. That’s why it is important for there NOT to be a default. Moreover, whether the ratings agencies call a certain event a default will largely determine whether a default has indeed occurred. That’s why the ratings agencies are incredibly crucial players in this Grecian drama. It will be very interesting to watch how the ratings agencies play the cards they have been dealt. Will they objectively call a default by its name. Or will they play financial shenanigans, like they did in 2008. Clearly, Prime Ministers, Finance Ministers, Presidents, and Central Bankers will come up with hundreds of complex reasons why there has been no default. But a Duck by any other name is still a Duck. In my opinion, the ratings agencies will conclude that there has been a Greek default. They will be objective and correct. They will not do so because of ethics or morals. They will do so in the best interest of their businesses. Ratings agencies deal in creditability. It is their stock in trade. Once gone, it is very tough to regain. Moreover, once gone completely, these companies have nothing left to sell to their customers. That is why S&P downgraded US Treasuries. They made one grand gesture to reclaim their creditability. In my opinion, they and the other agencies will continue down this road. They will not call a default a daisy or a bluebird or a polar bear with feathers. A default is a default and they will call one when they see one.
As indicated above, such an action could wreck havoc with credit default swaps, but Dr. Helicopter Bernanke and his fellow central bankers will know it is coming. They will do LTRO II or QE 3.789. They will allow the world economy to shake a bit, but not to freefall. They are far smarter than I am. They know a “default” is coming and they hopefully have a plan already in place to deal with it. All of which will hopefully lead to a brighter financial environment in the future. The world needs highly respected, creditable ratings agencies. We need ratings that fixed income investors can rely on. It is far better to live in a world where US Treasuries are AA+ (and this rating can be relied on), than in a world where private bankers and central bankers manipulate the ratings agencies, so that CCC CMO’s are rated AAA, and the ratings are about as useful as high heel shoes on an elephant. The world will survive the Greek crisis. And hopefully we will have involved creditable, reliable, honest rating agencies who will never repeat their mistakes of 2008.
By Floyd at KOTM follow me on Twitter @ USKOTM