The Outlook Remains Bearish

January 10, 2013 (11:00 am)

The market got a boost this morning with better than expected trade data out of China; however, it fell far short of making a decisive new high. For that reason, we’re sticking with our bearish outlook for the intermediate-term. We took profits on our near-term options in the Multi-Strategy Portfolio (we sold our HOT and SODA February puts for 30% and 7% returns, respectively) in order to push out our nearest options expiration to March. This should give us plenty of time to see our thesis prove out. While our expectation for a reversal in the broader markets remains strong, we don’t want to get into a situation where theta decay (the time value priced into the options) affects our positions. Allowing over two months for a reversal is the prudent path. We are also OK sitting in our short positions until the anticipated reversal comes to fruition.

We should note, though, that we continue to challenge our thesis. We are constantly looking for new information and analysis that disproves our thinking. If our conviction diminishes, we will not hesitate to get out of losing positions.

SPY (S&P500 Index)

The SPY formed a new high with the gap up this morning, but as we discussed above, it didn’t break decisively above the previous high set early last week. With the subsequent decline through the early morning, it’s starting to look like a double top. Interestingly, the target price of a double top reversal here is very close to the gap fill from the “fiscal cliff rally”. Whether it turns out to be a double top or not, this attempt to rally and lack of follow-through is not what bulls want to see here.


Broadcom. We took a short position in BRCM this morning as it failed to reach the upper trend line of a rising wedge it has formed since early November. You can also see buying momentum slowing, as it reached the exact same top ($35) from early January on a lower RSI. This could also be a double top in the forming.


Chipotle. To update our CMG analysis from yesterday (we took a short position as it broke below its lower trend line), the shares rallied briefly this morning. This rally brought the shares back up to the lower trend line, but it again failed at that point. This is fairly typical price action. You often see a re-test of a trend line after the shares break it to the upside or the downside.


Gold ETF. GLD is on our watch list. It has been forming a falling wedge since early November and is now reaching the upper trend line just as it enters overbought conditions. We may take a bearish position on a failure here, or conversely, a bullish position if it decisively breaks through to the upside. Either way, we’ll be watching this closely.


Google. We took a short position in GOOG this morning as it reached the upper trend line of a rising wedge it has formed. The shares created negative divergence, rising to a higher price on decreasing buying momentum.


Netflix. This is something we’re watching for now. NFLX is bouncing off the lower trend line of a well-defined rising wedge. We’re looking to take a bearish position on a breakdown.


Multi-Strategy Portfolio

January 3, 2012 (9:30 pm)

We took a number of positions today in the Multi-Strategy Portfolio. You can think of it as a long/short fund that utilizes options to leverage potential returns on near-term opportunities.

Berkshire Hathaway

  • 10% allocation of BRK.B Mar’13 $95 puts @ $3.00
  • BRK.B has been forming a well-defined rising channel for the last two months. Over the last couple of days, it gapped well above the channel and became very overbought on both the RSI and Chi-Osc. Over the coming days, it will likely at least test that upper trend line if not fill the gap. Depending on how it reacts at the trend line, we’ll decide whether or not to get out of the position there or wait for an additional decline.


Starwood Hotels

  • 5% allocation of HOT Feb’13 $60 puts @ $2.20
  • HOT reached the upper Bollinger Band today on overbought conditions. Each time the shares reached the current RSI level over the past year, we’ve seen a near-term decline in price.


Las Vegas Sands

  • 5% allocation of LVS Mar’13 $52.25 puts @ $4.35
  • LVS closed above its upper Bollinger Band as it closed in overbought territory. The shares are historically volatile and its beta is far above average. Past instances where the shares traded well above the upper bband preceded short- to intermediate-term corrections.



  • 10% allocation of QQQ Mar’13 $67 puts @ $1.92
  • QQQ traded above its upper Bollinger Band for the past two days, and both opened and closed above it today. Similar action has typically preceded at least near-term pullbacks in the past. On the near-term, the shares are overbought. The recent gap can be viewed as an exhaustion gap on high volume. It’s important to notice that a 50% retracement of the recent rally puts us right to the gap fill line. We may see higher prices tomorrow, but should see lower prices over the next week or two.



  • 5% allocation of SODA Feb’13 $47.50 puts @ $3.30
  • SODA also closed above its upper bband. This happened just as it reached both RSI and Chi-Osc levels that have historically had a good record calling near-term tops.



  • 5% allocation of V Mar’13 $160 puts @ $7.10
  • V similarly is at an RSI level that has historically preceded near-term tops. The shares are a bit stretched here.



There are a number of other stocks that we’re watching for near-term opportunities.


BA has formed a well-defined rising wedge over the last 9 weeks. It has since seen two very minor breakouts – the first to the downside and now to the upside. Since it broke out as it entered overbought conditions, this is very likely another false move. If the shares fall back into the wedge, we’ll likely enter a bearish position.


Bank of America

BAC has been forming a very clear rising channel over the past six weeks and has climbed over 30% during that time. The shares are over stretched here. We’ll likely take a bearish position if the shares break below the channel.



YELP has formed a multi-week symmetrical triangle. It has since broken to the upside and is now forming a bull flag. If a market pullback creates an opportunity with the shares re-testing the upper trend line of the triangle, we may enter a bullish position.


Quick Market Update (Still Bearish)

January 3, 2013 (2:00 pm)

NYSE McClellan Oscillator ($NYMO) Negative Divergence

The market continues to tick higher, but we’re seeing more and more signs of a pending reversal. The SPY and QQQ both opened and are trading above their upper Bollinger Bands. Both are also trading at or near very overbought territory on the near-term charts. Additionally, the NYMO has formed negative divergence by creating a lower high while the SPY made a higher high.

NYMO Negative Divergence

SPY Rising Wedge

Further, the SPY has formed a clear rising wedge since the gap up yesterday morning. This has taken place on declining volume. There’s also now clear negative divergence on the near-term RSI. Similar to the NYMO, the RSI is indicating that these new highs are taking place on falling momentum. Each of these signals are bearish indicators.

Rising Wedge

Multi-Strategy Portfolio Purchases

We took a number of positions in the Multi-Strategy Portfolio this afternoon. We will dedicate a separate post to those purchases. Suffice it to say, each position is bearish. The coming days and weeks are likely to be volatile. The extremely low volatility this morning allowed us to take inexpensive positions to be able to take advantage of the likely downside pressure in the markets. We also expect volatility to rise from here, which could add an additional boost to the price of our option positions.

The Start of a Melt-Up or Irrational Exuberance?

 January 3, 2013 (9:15 am)

Yesterday we saw a continuation of the huge rally sparked on Monday morning, when expectations turned positive about a successful conclusion of the fiscal cliff talks. It reminds me of the price action following the QE3 announcement in mid-September, when we went from $138.50 to $146.00 in a straight line. The SPY became overbought and retraced half its gains over the next two weeks. After rallying from $139.50 to $136.00 at yesterday’s close, we’re now entering overbought conditions again. We went short in the SPY Portfolio at $145.35 yesterday morning and expect to hold those until the SPY closes the big gap down to $142.50.

That said, one thing we’ll be cognizant of is the potential for a melt-up rally. With the Fed pumping tens of billions into the illiquid debt markets each month, the liquidity is flowing. We’re constantly looking to disprove our thesis. As conditions change, and as our charts dictate, we’ll remain nimble.

In the chart below, you can compare the action from the past two days to the action after the mid-September Fed announcement. Also, it’s important to notice that we’re entering overbought conditions before we’ve touched the upper trend line of the (blue) rising channel.


The SPY Rising Channel

The chart below provides a closer look at the rising channel. Also notice that the RSI made a slightly lower high in the very near-term even though the price is higher. That creates negative divergence, with the buying momentum slowing compared to the price. A bearish sign. We’re comfortable holding our SPY short positions here, and expect a near-term pull back.


Apple Resistance at $555

The Apple chart below illustrates the downward sloping trend line that the shares finally broke through on Monday morning, powering a substantial rally. $555 has been a line of support/resistance for much of the rally and the shares reached overbought conditions on the near-term as it reached that price level. Consolidation or a slight pull back would be healthy here to allow the shares to back out of overbought levels before powering through that price point.


Double Bottoms Galore

The potential double top reversal pattern we discussed on Monday is now clearly off the table. The two (larger and smaller) double bottom reversals remain firmly in play.


Apple Weekly Indicators

The chart below includes two significant aspects. The first is that in each instance that the RSI and Chi-Osc both became oversold (orange lines), the shares saw a powerful rally as the indicators reversed out of oversold conditions. Second, we’ve retaken the long-term trend line. It was important that the shares didn’t remain under that support level for very long, and the fact that it began 2013 by powering above that level is clearly bullish for the shares.


Apple Long-Term Rising Channel

The long-term channel remains intact. The bounce to the downside may have been an overreaction to the previous upside breakout in the channel.


Apple Lines of Significant Support/Resistance

Throughout the recent correction, several lines of support/resistance were tested and re-tested. As many of them proved to be (temporary) support on the way down, they’ll likely prove to be (temporary) resistance on the way up.


Where Volatility Stands

In the near-term, volatility is oversold. A spike in the VIX tends to coincide with weak near-term conditions in the broader markets.


…and a longer term look at the VIX.