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Where is $SPX heading next? I expect down and here is why.


I was wrong many times in predicting the direction of this market. For about five months the market headed nowhere. We are range bound between 2000 and 2100 level with a few over shots which are immediately sold off.

Although the overall long term bullish trend is intact, we are undergoing either a huge consolidation or a standard distribution.

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What happens if we are in a consolidation pattern? Well, in this case I mean a bullish consolidation pattern. We got into this pattern from a bullish rally, now consolidating heavily (meaning going nowhere) and once we break up thru this pattern we will see a new strong rally.

If we are in a distribution pattern then the bull trend is in trouble. If this really is a distribution pattern then we are at its very beginning and we may see some more up or down trading, but overall this may reverse the market and send it down.

Every rally occurred on a missing volume and was sold off on a heavy volume hard every time so far. Even today’s rebound from Friday’s selling was accompanied by absent volume. So I think, we may see more selling this week.

I try to set up my trending software so I can see the trend more clearly (short term trend since I trade weekly options against $SPX) and here is what I can see so far:

SPX trend 200 ticks

As you can see I have the charting software set to show swings based on ticks and Heiken Ashi candles. This set up helps me to see the trend more clearly. And what I see now is that we swung up and basically exhausted any momentum in that swing.

The pivots indicate a sell signal, the trend shows red candles, and the MACD is in the extreme, pointing down, and fading. I do not see anything in that chart which would point to more upward buying. But, I may be wrong. Tomorrow will show what is about to happen. My expectation is DOWN however. And if not tomorrow, then later on this week.

Here is another view which makes me think we are not done with selling:

SPX expected move

As you can see, although we had nice strong rally today, it didn’t have enough power to reverse the short term bearish outlook – the candle in Heiken Ashi chart is still red (although weak), the PPS is still with a sell signal and we are on a downtrend slope. The only slightly positive is MACD which started pointing up again and changed into solid green histogram. That is the only light in the tunnel which may tell us that we may see a reversal and upward trend continuation.

If I am wrong and the market moves up tomorrow, this may be the point to go bullish again. But even if this happens, there are a few strong resistances, one at 2115 and the second one at 2120 which must be broken before we can call this a bull’s victory. Two attempts in the past already failed. Will the third be the charm?

Happy Trading tomorrow!
 




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Posted by Martin April 20, 2015
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Legacy Reserves (LGCY) cuts dividend


LGCYLegacy reserves cuts its quarterly dividend today to 0.35 down from 0.61 cents. The company originally planned to sustain the dividend as it did in 2008, however, at the end of the day they gave up and reduced the dividend.

However, it is apparent that the market expected this cut months ago and already priced the cut in when the stock traded at $10 or even $8 a share. This price reduction was probably inspired by cuts made by LINE and BBEP previously. Thus now the stock price already reflected that.

As cutting the dividend was expected, then both outcomes were possible – no cut, the price would jump, – cut of the dividend, the price would jump too.

And that’s exactly what happened. Amid the dividend cut, the stock rallied by 9.15% today as it was appreciated that this cut would improve the company’s balance sheet ahead of oil recovery.

Thus this move helps our put options we hold in our account, but hurts our dividend income.

Hopefully, this trend will continue and as oil continues recovering the stock recovers in price, recovers its dividend and our options trades keep expiring worthless for full premium profit.

LGCY trend

When you click on the picture above you will see today’s trading with a large bullish uptrend. Even after hours the stock continued spiking up high. If this continues this way up, our trades will end up very well with very nice profits. I am even planning on selling more puts against this stock.

The put selling against this company also helps offset my loss on the stock. As you can see below, if I held a stock only, I would be losing $477.72 on my 36 shares I own. However, my put options I sold earlier are now helping me offsetting the loss. I am losing $235.72 only as of now.

But, if I add all dividends I already received from this stock in my TD trading account, my loss would only be $106.13 in lieu of $235.72!

LGCY positions

Granted, those trades are not over yet. One positions is set to expire in June 2015 and the second spread is set to expire in September, and many things may happen in the meantime. My expectation is however that this stock will go up as oil will be recovering so I believe that these trades are no brainer.

It still can be a bumpy way up, so if you mirror my trades (via our free newsletter where we publish our trades), you need to be prepared for the bumpy road. But, in my opinion, it will be a rewarding one if you hold tight.

This is one reason, why I like selling put options against dividend (or even non-dividend) stocks since the options would allow you to collect premiums which may be considered an additional dividend.

Happy trading!




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Posted by Martin April 15, 2015
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Kinder Morgan (KMI) increases its dividend


KMICurrently, this cutie (KMI) is paying 1.8 bucks per share annually. That translates it into nice income of 4.30% on invested dollar. Where else can you get such nice interest? No bank would pay you this. Not even bonds (they actually pay a negative interest). So unless you start your own consumer credit loans business where you will be legally allowed charging a usury interest of 20% or more you won’t get any better return on investment anywhere else.

KMI announced today after close that it is increasing its quarterly dividend to 48 cents a share, up from 45 cents in the fourth quarter of last year. The company plans to pay a full year dividend of $2 a share! And they are on track to meet this goal so far. Basically KMI plans increasing dividend by 50 cents every quarter.

The stock slipped about 1% in afterhours trading as the company announced revenue and earnings for the first quarter that were a bit light of analyst expectations. The stock closed Wednesday at $43.43. (Source Barron’s)

What can I say to this?

Yes baby, go down on all those anal-yst expectations so I can buy more!

Currently, I own 98 shares of KMI in my dividend growth portfolio and I am definitely LONG on this stock.

 




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Posted by Martin April 13, 2015
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$SPX selling today didn’t change my bullish outlook


I thought that today’s selling would mark an end to the bullish trend making it yet another sold off attempt of new highs. But when I looked at the chart later at the end of the trading session to my surprise it didn’t change the bullish trend at all and we are still in an uptrend.

Although an intraday trading didn’t look like that at all:

SPX intraday trend

Early in the morning stock market was moving up, but then, suddenly out of blue a selling started. Media say, it was because of Greece and worries about earnings.

I think it is a nonsense. All this still looks like that we are dealing with a distribution phase.

What is a distribution phase?

A distribution phase is a major market topping phase. It means that the markets are about to reverse from a bullish trend into a bearish one. But do not worry. This phase takes a long time to complete. It doesn’t mean that the reversal happens overnight.

This phase can take from a couple of months to a year or longer before the market reverses and heads down. In 2008, this phase took almost two years. It started in early 2007 and ended late in 2008 before the market dropped hard.

How do you know that we are in this phase?

One of the signs is that markets struggle to move higher and whenever it moves higher, it does so on a low volume and it is followed by a violent sell off on a high volume. Every time the market tries to make a new high, it is sold off. Sometimes markets make new highs, but they are weak and immediately sold.

It means that big players are getting rid of their stocks and raising cash. And who is buying? Uninformed investors.

How does this affect my trading? As of now it doesn’t. I trade too short term positions to be worried. All I need to do is to assess correctly where is the market heading for the next week and position my trade that way.

Where is SPX going tomorrow?

My outlook for tomorrow is still bullish. I plan on opening a new trade tomorrow, but to do so I need to wait for tomorrow opening to see whether today’s selling was really a reversal (which it doesn’t look like that at all) or just a short ease off before new uptrend continuation.

SPX expected move

As you can see above the candle for today is still green and that is a good sign that the trend really hasn’t changed yet. It is also a way above 21 day EMA and the slope of EMA is upwards and actually strengthening. MACD is also pointing up. Although this still may change on a dime, the trend for tomorrow is still up.

Happy Trading!
 




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Posted by Martin April 13, 2015
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$SPX selling another rally attempt today!


$SPX more and more the market tries new highs it is sold off – distribution phase. Big boys selling off to retails. Bearish




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Posted by Martin April 12, 2015
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Is $SPX finally going higher or is more volatility coming?


Last couple of months it was really difficult to say what the market wants to do. It went up a few days, then reversed and fell hard next few days just to reverse again. Trading in this environment was extremely difficult for me.

But at least it was a great opportunity for me to look for shaping my chart reading and improve it in such way that I would feel more comfortable predicting the market move.

What is a typical prediction accuracy? It is 50%. You have 50% chance to be right and 50% chance to be wrong.

What if there is a way to increase a chance to be 70% correct and 30% wrong? Wouldn’t that be awesome?

I still do not have a crystal ball to predict the market, but still working on it. That means that I still do not know for sure whether the market really would do what I am about to predict or not.

SPX expected move

For Monday April 13th I expect the market to move up. The reason is that the candles are green and above 21 day MA. Also MACD is pointing up. Of course, tomorrow we may see a red day and that would mean a reversal of this trend. However, earnings season and economic data may be a catalyst for upward move. We are in an environment where “bad news is good news”. Weak economic data assume postponing interest rates hike from FED and that’s what may push the markets higher.

So I expect an up day. If the day ends up down, then on Tuesday I will open a bearish trade. Monday and Tuesday trading will show the direction for the entire week.

Happy trading!
 

 




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Posted by Martin April 11, 2015
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New purchase in ROTH IRA – ConocoPhillips (COP) for 4.60% dividend yield


UPDATE: (04/14/2015) Yesterday, ConocoPhillips price dropped a bit. That allowed me to lower my limit price lower to $67.55. Today, the trigger order fired and executed my limit order. I bought 16 shares of COP today!
 

In my ROTH IRA account I use a commission free ETF to save money for my next purchase. Because of free purchases of the ETF I can buy one share and sell one share and pay nothing. This allows me to save all dividends and my small contributions into the ETF and once I have saved enough I sell the shares in ETF and buy a dividend paying stock.

Last Friday, I saved my minimum amount for purchasing a stock – $1,000 so I could sell the ETF (without paying any commission or trade fee) with 4% profit, release the cash, and now I am placing a purchase order for Monday to buy ConnocoPhillips (COP) stock.

Conditional order

On Monday I will initiate my first position in COP. But I will use my trigger order strategy to buy this stock. That means, that I will place a conditional order to purchase this stock only if it moves higher. If it starts moving down from the current levels, I will not buy and my limit order will be lowered to a lower price. That means that I will be able to track the price down and buy into a position only when the stock reverses (or continues higher from the current price.

See the white board below:

Conditional orders

As you can see, I place my initial limit order slightly above the current price (P1). It is a conditional order, basically saying “if the price is equal or greater than P1 then enter a limit order to buy at P1 price.“.

So if the price of the stock goes higher, hits the P1 limit, the conditional order gets hit and it activates a limit buy order. The stock gets purchased.

If however, the stock goes lower, I will lower my limit price to P2, and then to P3, and P4, etc. If at the bottom the stock reverses and hits my target (P5), the stock gets purchased and I will ride it up.

Of course, this is not a 100% bulletproof strategy, but works most of the time to capture a better price.

Sometimes you will get filled and short after the fill the stock reverses back down and continues in a selloff. That’s a reality of the market. It happens and you cannot do much about it. But at least we tried to get the best price, right?

To eliminate a negative impact of this, I never use an all-in purchase but buy a small portion of the entire position. So if the stock reverses and continues lower I can repeat the process to add to my position.

Trade detail

On Monday, I will have the following conditional order out:

If COP last is equal or greater than 67.71 then
Buy 16 COP at 67.71 LIMIT GTC

Total shares holding after the purchase: 16
Estimated annual dividend: $46.72
Consecutive Dividend Increase: 2 years
Dividend yield today: 4.60%
Dividend 5yr Growth: 8.45%
Dividend paid since: 1934

This stock may also provide a nice capital appreciation when oil price returns back up. This stock may also move back up to ~$80 level and make a nice ~$12.30 capital gain per share. In the meantime, I will be collecting a nice dividend, which I will be saving into a commission free ETF, saving money for my next purchase.

What do you think? Would you agree with COP stock or do you prefer a different energy stock?

Happy trading and investing!
 




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Posted by Martin April 05, 2015
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Selling Seadrill (SDLP) & LGCY puts to add stock into my portfolio amid all negative sentiment


It is hard to be buying when everybody is negative on a stock, predicting its further collapse or struggle. These days we see oil exploring companies out of favor. Many had to cut on employment, investment and even vut the dividends.

When reading what other investors think about oil companies, you get scary stories, gloomy predictions, and stay away outlook.

I admit, that take a trade and buy a stock in such review and expectations needs a lot of courage. It is a gut wrenching approach sometimes to be a contrarian.

I recently took a position in Legacy (LGCY) for this same reason. Everybody was busting this stock and predicting its gloom and doom. I believe, this stock offers a great opportunity and it is worth to dedicate some cash to it. Lately I even opened a bull put spread against this stock expecting profits when oil goes up and the stock with it.

Today, I plan on taking yet another gut wrenching opportunity and initiate a position against Seadrill (SDLP) stock. It is another oil involved company making money shore drilling. Recently the stock tanked as many others in this industry and investor have only a scary stories and expectations. Only a few of them out there are posting articles having something nice to say. And whe they do, they are immediatelly attacked by others who invested in the stock when it was at $30 a share and now they are at a huge loss.

 

But with companies like this, you need to define an investing style (or strategy) you want to apply:

1) Either hold and collect dividends and go thru the thin or thick of the stock.
2) Or trade the stock and when there is a sell off coming, sell it and buy back at the bottom (well, if you are good at market timing).

If you decide to hold on and go thru bad times, you can do a few things – hold the stock, collect dividends, and sell puts or put spreads. That’s exactly what I am doing with LGCY stock while waiting for it to go up. I collect the dividend and I collect premiums from options.

So I am going to do the same with Seadrill (SDLP) and LGCY (adding to my existing LGCY position). I will sell put options against these stocks to collect premium if the stock goes up and stays above the put strike price. If not, I am OK to accept the stock, actually I will be happy to buy those stocks at those prices.

There will be two outcomes:

1) the stock stays above the strike price, the option expires worthless and I will keep the premium
2) the stock drops below the strike price and stays there at expiration, then I will be assigned the stock and buy it at the strike price plus I will keep the premium.

Since the price of the stocks are so low I am very comfortable to buy stocks at those level.

If you want to see these trades details, strikes and expiration I am going to take, you need to become a subscriber to my free newsletter where I publish my trades.

Good luck and happy trading!
 
 




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Posted by Martin March 29, 2015
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Running a zig-zag trade: my worst trade ever ended relatively well


My dream is to trade SPX weekly options and generate weekly income, which I can invest into dividend paying stocks. I believe and hope that with dividends and options income I can boost my portfolio and grow it faster than when just investing into dividend stocks only. I believe, that it is actually my only chance to get up to speed with my retirement savings.

But to trade options, one must do it right. And this is proving to be the hard part of option trading.

Last year was very good although the end of the year ended as a disaster to me, this year seems to be worse. Not in terms of losses, because I, fortunately, created no losses so far, but from the volatility perspective.

Yes, 2015 proved to be the most volatile year to me. For experienced traders this is a great environment for trading. At least this is what traders claim. They say that this falling and rising market is the best for them.

I admire it at one hand, but struggle to follow it up. How they deal with those sudden reversals like we saw a few days ago? I have a hard time to believe it. But the reason of this post is not to expose those traders, dishonest them or envy them. I just say this to say that I admire it and I wish to get there. “There”, meaning to a state of trading that I will be able to see those changes coming on time and react to it properly.

The purpose of this post is to share a trade I recently took against SPX and what SPX did to me and how I reacted. Now, at the time of retrospective I can see my mistakes. But when the trade was happening I didn’t see those mistakes coming.

What is most important however, is that no matter how terrible the trade was, it actually ended well. I didn’t make any money, but I didn’t lose as well. In other words, I was able to turn a sure loss into a break even trade.

What happened?

On March 3rd I did my market review and I got a bearish outlook. I expected the market to fall further down. But on Monday, the next day, the market rallied strong up and I saw this as trend continuation. I saw the first green large candle as an invalidation of my previous bearish outlook. So I opened a bullish trade against SPX – a bull put spread with the following strikes: 2080/2085. If the market remained above 2085, it would expire worthless for a sure profit. At 2116 level, this wasn’t a problem. Below you can see what I was doing:

SPX history

As you can see, my thinking was proved to be wrong. On Tuesday the market continued falling. I was thinking that this was just a temporary pullback and that we will bounce off of the 2093 level. Unfortunately it didn’t happen and on Friday, the market basically crashed. And that forced me to react.

Should I have taken a loss by closing the trade or do something to salvage it?

Defending the trade

I decided to salvage the trade and roll it away in time. I still believed in the trend. I expected the market to shake this selling off, reverse and continue back up. So I moved those options away by two weeks from March 6 expiration into a March 27th expiration. I decided to keep the strikes same as I was bullish:

SPX trade history

The chart above shows where I took action and moved the expiration into a further away time. But the market continued heavily in selling the next week. Monday was green again, but Tuesday hit us again with heavy selling.

I must say, I became nervous. Should I have acted or left the trade alone? If I have left it alone and the market continued in more selling, I would not be able to save this trade at all and it would be a sure loss. I thought that I needed a cushion. I needed to move the trade in case more selling was coming. Now I see this as panicking and being dragged into action by the market and not by a rational thinking.

Stay calm, everything is OK, panic!

After another set of heavy selling I decided to reverse the trade into a bear call spread with the same expiration of March 27th and the 2025/2030 strikes. If the market fell lower and remained below 2025 at expiration, the trade would expire for a nice profit, see the chart below:

SPX trade history

The market continued in heavy selling that day and the following day. But the selling in the following day became weak and stopped at 2040 support created by a lower Bollinger Band and a trend line. I started smelling trouble again. Then the market rallied hard and although after that there was selling again, it started to become apparent, that selling was over.

Is it right this time?

I decided to reverse the trade again from a bear call spread into a bull put spread with 2095/2100 strikes. This time the market had to grow up above 2100 and stay there by expiration. See the chart below:

SPX trade history

I must admit, that at this point I was totally driven by the market and trades were already based on emotions. Although the entire trade was still profitable, I had big doubts whether it could ever end up with a profit. But what was worse was that I was running out of margin buying power. The worst enemy of the trader. Once you get extended on margin, it can kill you without hesitation. I was risking $1,500 to make $285 and that was beyond my comfort zone.

But the trade was still showing a loss. Should I have ended it or continue the struggle? I felt like a hare running zig-zag in front of a wolf trying to save his life.

Soon the market grew above 2100 and was about to stay there. It even started attacking its previous all-time high at 2119 level. I now felt good about the trade that I was able to manage it even at a high cost of margin power. I was completely unaware of what was coming at me.

The market reached 2115 level and started reversing again into a big selling which was coming. Fortunately this time I was able to spot this on time and decided to act once again. I couldn’t roll the trade anymore as I had no margin buying power to do that, but I decided to try reversing the trade into a bear put spread. It is a debit spread and I knew that by doing so, I would lose all gains I made so far, but I would lose nothing.

No matter what I did it was wrong

To reverse the trade I did the following swap. I had a long 2095 put and a short 2100 put. I decided to buy back the 2100 put and sell a new 2090 put. So the original 2095/2100 credit put spread became a 2090/2095 debit spread. For this transaction I paid $5.20 or $520 per contract. This was a losing trade from the beginning because with a debit spread all you can ever make is the spread width, or $500 per contract. I paid more for it than I could ever make. But I had previous credits collected!

SPX trade history

My reaction proved to be correct and right on spot at the right time. I am grateful for this because this saved my trade. As you can see, that same day when I reversed the trade and the very following day the market crashed again.

This could set our trade to expire in-the-money next week. It could end the trade with a nice profit at about 11%, but because I will be traveling next week and I will not be able to watch any of my trades until Wednesday next week, I decided to close the trade earlier. It could be still profitable trade, we actually made $60 on this trade, but commissions ate it all up, se we ended with a small loss of $17.50 (-1.22%). Better than a full loss, right?

Below see a screen shot of my trade book recording to see the entire trade and all steps I just tried to describe above.

SPX trade history

It was a difficult trade full of emotions. I admit that. But I am glad I was able to manage it to end it with a small loss rather than a big one. It was also a very stressful trade but I learned a new strategy on salvaging a trade. Hope I will be able to use it correctly in the future to make money instead of losing them. It also proved one important thing – when trading options, you must stay small, do not overtrade. Once you overtrade and run out of available cash you are doomed to losses. You will be forced to close a trade in the worst time with a loss.

SPX is a canibal ready to eat you alive

SPX is a nice vehicle to trade, but it can be a very dangerous, evil savage, who can eat you alive. Don’t let it happen to you and don’t let it fool you like I got fooled before. This lesson ended well with a very little loss, but it could turn into a huge loss. With a knowledge of how to trade options and how to eliminate risk involved in them, you can win this battle even when it turns against you.

 

What was my lesson from this trade?

So once again – learn a lot about options, learn a lot about technical analysis, be patient and stay small to succeed. I say this again not just to be bossy, I say this again mainly for myself. It is the most important rule ever.

I wish you a great trading next week and I’ll see you the following one.

Happy trading!
 
 




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