Ah, the benefits of CASH

I have to admit, I love cash nowadays. You can move in and out of volatile investments (Forex and Commodities) quickly, and then allocate it to my favorite (that's American, not Queen's English, mind you) investment vehicle, high quality IPOs. There have already been announcements of upcoming quality IPOs such as Felda MSM, Bumi Armada, and units of the MMC group - Gas Malaysia, Johor Port, and Malakoff. But what we need to do is to ensure that we have enough cash in hand to "play" while not over allocating, and losing out on "opportunity cost."

So I'll go for UOA Development's (that's United Overseas Australia, listed on ASX and SGX) large IPO (raising RM1.18 Billion, with 70 million shares reserved for small players like us), which is priced at RM2.90 a piece. They developed Bangsar South, and with Malaysian's love affair with property continuing unabated, this makes sense.

PS-Jim Grant, an extremely prescient investor, said in an Article in Yahoo! Finance that keeping cash, to take advantage of crashes is good, because recoveries now tend to be fast and furious....(Quote) "Perhaps one way to proceed is to hold cash at the opportunity cost of not much in Treasury bills. You make nothing, but you want to have this money when things are absolutely, not just relatively, cheap. This time of full or overvaluation shall pass. On recent form, it'll pass in a thunderclap and there will be a panic and it'll seem as if the world's ending. And that's when somebody who is nimble can get fully invested in a comfortable way."

PLAN YR TRADE, OR PLAN TO FAIL

PLAN YOUR TRADE, or YOU PLAN to FAIL

I always make it a habit to have a Trading Plan for the week - trade, demo trade, or
no trade. It helps set the right perspective - and when you find that you are right,
you ride the wave baby! So here's the plan next week:

1. Looking at the SPX above (darn, I forgot this last Friday and got killed on the Aussie after a long profitable run on the Euro... Silly me), it looks like we have to break above 1350 or below 1330 (tight range) to determine the next course of action. Support of SPX lies below at 1330, 1324, 1317. At the topside, resistance is at 1353, 1361, and 1385 (now that would really send us higher). The SPX chart above reveals the Inverse Head & Shoulders pattern. Was it a "fakeout" or a was it for real?
2. On the DOW, it's much more clearer, support is at 12,260-12,300
3. Since this is Options Expiration week, I expect Monday-Tuesday to follow the last friday's continuation trend down. But expect a whiplash on Wed - Friday, as expiration weeks are normally bullish (on the other note, just stay out if things are too volatile)
4. Silver ETF is a Six Flags Roller Coaster ride. I am long June 34 PUTS as I expect this thing to totally collapse to its January levels of $25 (it's now $34). But maybe since this Options Expirations week, I could sell some MAY Puts to offset my price, assuming they whack the buster up at the end of the week.
5. I am also looking at OIL - there's an interesting pattern there about filling the Gap.

We will execute either by going SHORT EURO (market breaks down) or LONG AUSSIE (market breaks up). So I expect it to be a tale of two halves - shorting EURO in the early half and riding the whiplash of the AUSSIE up on the rebound. Now I just have to wait for the fundamental news to pull the trigger.

Many people are still bullish on the market, with the DOW's target at 13,300 by end of Summer (who knows? Markets are thin in Summer, making it perfect to "climb the wall of worry". So let's focus on next week with that backdrop in mind.

TESTING TESTING

Just testing before I make my grand Comeback... :-)

MODIFIED COT STRATEGY

Students of my FXOptions classes know the power of Commitment of Traders, some even swearing by it, and laughing all the way to the bank! The returns on COT trades are staggering, as proven by real trading records from our students and even trading scenarios on PFX. But COT trading has its disadvantages in running large drawdowns in your account. This could be OK under normal circumstances but what if VIX is above 30 and is going up, like the current scenario? A high VIX is bad, and could lead to "abnormal" drawdowns which could cause YOU TO CAPITULATE INSTEAD! So how do we take advantage of the COT on the USDJPY when VIX is high?

Use a modified COT strategy which limits your losses on each lot. You can start buying USDJPY at the spot market, and keep on buying as it falls by 100pips. For each lot of USDJPY, you should buy 1 Protective Put Option (you can do this on ThinkorSwim or Saxobank) which expires this Friday (Options Expiration, although you can go longer on Saxobank). Even as the USDJPY goes against you, the effect of the Put Option is to limit your max loss to the cost of the Put. (This is a weird strategy because YOU WANT USDJPY to GO DOWN, DOWN, DOWN....). Once capitulation occurs, you should buy back the puts, which should have some time value left. This will allow you take advantage of the move up without suffering massive drawdowns. The drawing belows depicts this in graphical form.

For a more in depth tutorial on Protective Options, go to this link at PFX Global.

Happy Options Expiration!

Chief Shook

WAITING FOR VIX and VXO

The market just wants to go down it seems. Even a coordinated injection of over US$200billion has failed to calm nerves. Good CPI number? Yup, only to be torpedoed by the news of a bailout of Bear Sterns (by JP Morgan and the Fed, of all people). The VIX also closed at 31.16 which is the highest VIX close since March 2003. It's obvious that we're going into what will be a
volatile and roller coaster Options Expiration week. In addition, Put/Call ratio (CBOE) is at 1.16, the highest since, you guessed it, March 2004. So March seems to be a month of extremes! (and we thought it was October). It becomes clear that fortune favours the brave in March.

Looking at our "Triangle of Hell", the SPY is increasingly underpressure to test its support of 127.5 and its low of 125. If this breaks, we should see 122-122.5 and if that breaks....err, I don't want to talk about it since we'll have to seet the monthly fib retracements to get an idea of where we're going to (hell, that is).


It's possible that we have some ways down to go, which could result in"a bottom" (don't ask me whether it's "the bottom"). There are several reasons for this (aside from VIX and Put/Call extremes):
1. The market looks like it's extremely oversold (which is not a reason to buy the market anyway, since oversold leads to more selling) with pessimistic extremes. Notice how market turns happens when chicken little cries that it's the end of the world (for Bear Sterns investors, it probably is)
2. The Yen, which is a barometer for risk, is showing extremes with commercial traders at 0 (short yen) and specs at 100 (long yen). The recently released CFTC data shows specs reducing their long yen and long euro positions. This could be the recipe for a blowoff top (or bottom). I am encouraged by the Yen's movement which hit our 261.8% fib target at 99.15 which means a recovery rally is expected.
3. Historically, this could be "March madness" - when such extremes last happened in March 03 and March 04, the markets popped up.
4. Central Banks are in an intervention mode nowadays as can be seen from last week. The Bank of Japan could spring into action and stem the rise of the Yen, saving its manufacturers.

So how do we take advantage of this situation? First off, we shouldn't panic ourselves. Once we get this pyschological thing, then we have to lay the trap door for the frightening apex of VIX which could occur soon. In this case, we are waiting for extreme panic in the market, with VIX spiking to at least 37, with breach above 40 highly probable (in the late 1990s and early 2000s, the VIX spikes were at 45-50). Once capitulation occurs and is supported by VXO moving inside the Bollinger band, we have several choices:
1. SHORT the reverse proshares of the Dow (DXD), S&P500 (SDS). You get more bang for the buck as it moves twice as fast as the Indices themselves, i.e. DIA and SPY
2. BUY the ITM Options on the DIA to catch the fast and furious capitulation rally
3. BUY stocks which have held well during this rally, for example, those in the commodities complex, particularly agriculture and gold
4. Do a COT trade on the USDJPY (or AUDJPY) in 100 pip decrements. Note that your account must be able to sustain drawdowns. As the shorts clear their positions, the run-up will be fast and furious
5. Buy ITM April call options and increase your position as the USDJPY goes down
by 100pips. You can do this with Exchange Traded Options on ThinkOrSwim or with
Vanilla Options on Saxobank (you can even consider a similar strategy using OPTIONS on the USDCHF pair)
6. Once capitulation occurs, lock in the value of GBPJPY for one month. Buy the currency pair and sell a call option to give you around 1200-1500 pip protection. You should cruise earning the interest differentials in the next month, which works out to US$2.60-US$3.00 per mini lot a day. Why bother trading when you can earn interest,by allocating US$1,500 per mini lot? Scared of the volatility of GBPJPY? Then try out AUDUSD and buy yourself a 350 pip hedge.

These strategies should take into consideration your expertise. Pick something which you are most comfortable with.

The chart below shows how the markets behaved on the previous VXO and VIX peaks. The
markets turned promptly, rewarding strategic and patient investors many times over.
I rest my case.....Good luck and BOOYAH!


Note: These guidelines can be implemented by students who attend my FXOPTIONS classes. Don't try doing what you don't know, especially for new traders. Learn first lah!

Chief Shook

WAITING FOR CAPITULATION

The markets are in a doldrums, as the NFP (NonFarm Payroll) reports confirmed another minus
63K of job losses last month. The US looks like its in a recession, or is it? The S&P500 has
taken a hit and has broken down our so-called "triangle of hell." Fxoptions course students can
see the fake out to the upside of the triangle which was eventually stopped dead in its tracks.
(Fxoptions students would not have traded this fake out because they knew the market was going down due the commitment of traders on the VIX as well as the 10 Year Treasuries futures....How smart is that?). Look at the Triangle for yourself.

I am eager to see how the KLCI does on Monday (11/3) morning. What's the implication of the ruling National Front losing its 2/3 majority? Should make the local market a good buy once we get capitulation on the S&P.

So what is capitulation and how do we recognise it? Taking this definition from Investopedia, "In the stock market, capitulation is associated with "giving up" any previous gains in stock price as investors sell equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling. After capitulation selling, it is thought that there are great bargains to be had. The belief is that everyone who wants to get out of a stock, for any reason (including forced selling due to margin calls), has sold. The price should then, theoretically, reverse or bounce off the lows. In other words, some investors believe that true capitulation is the sign of a bottom."

Here are some telltale signs of capitulation:
1. A VIX Spike - usually to above 37. Due to the volatile nature of the markets, don't be surprised
if $VIX spikes to 45-50, as was the case in the late-1990s and early 2000s.
2. $VXO spiking above the Bollinger Band. Be careful as VXO might (and will) climb up the Bollinger
Band without peaking. You need experience to tell.
3. A sudden reversal in stocks after a seemingly bottomless pit. The recovery is fast and furious.
We'd normally like to see multiple tests of the lows before committing. Also, recoveries can take
place much later in the day.
4. An extremely HIGH VOLUME day, giving credence to the turnaround (instead of it merely being a "dead cat" bounce.
(Note; Those who are more adventurous could also wait for the $TRIN to go above 3.5)

Here's what the most recent capitulation looked like (Source: Shadowtrader, Redoption)

Happy Capitulating and make it GREEN with PROFITS!

Chief Shook

MALAYSIAN TSUNAMI

As Forex traders,we know of two important issues - the Internet and Inflation. We use the Internet to trade Forex and we know inflation tends to push up values of currencies (through interest rate differentials). Somehow, Malaysia's ruling coalition forgot these rules.....Should come to my Fxoptions classes, eh? For the political tsunami that washed away the West Coast of Malaysia (Selangor,Perak,Penang, and Kedah, not to mention Federal Territory) is the result of a well-coordinated campaign in cyberspace. These feelings of uneasiness were furthered aggravated by inflation in daily goods and services - as can be seen by the rising DBC Commodity Index (wheat and fuel have risen dramatically in the past few weeks). This created a perfect storm for the Rakyat to voice their displeasure, which they gleefully accepted in full force. The outcome was something we never saw before as the Mainstream Media were at a loss of words to report what was going on after Penang, Kedah, Selangor and Perak all fell like dominoes (count in Wilayah too, except that there's no state called Wilayah). What's my hope? That the Government and new State Goverments (they're not "Pembangkang" anymore.....he he he) work together to keep prices in check. We are still in the middle of a commodities bull run that could take prices even higher. More than ever, we need a "welfare state", albeit temporarily, or run the risk of more of the rakyat falling below the "poverty line" (be it real or virtual). And even if commodities were to come down, it would probably be in response to a recession, which is also not good. Lets hope for the best. The brave people of Malaysia have chosen, so the Governments (federal and state) should give them what they want! POWER TO THE BLOGS AND PEOPLE!

Btw, could be use Kelantan's humungous gas reserves to subsidise our fuel and gas?

Chief Shook