Supersonic Fiscal Free Fall………………..Evil Plan 93.0 (by BDI)


Well, my fellow Slope-a-Dopes, I’ve been hearing a lot about the dreaded “Fiscal Cliff” for quite some time now.  So I decided to take a flying frog freelance free fall leap into the woefully written word abyss, to see if I could sort out for myself, when and how we would experience the coming sensational supersonic splat

First off, let’s review what the term “Fiscal Cliff” actually means. In order to understand something it’s usually best to know exactly what it is.  

This definition from

“Fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.”

Now that we are facing this self inflicted sequestration law that the U.S. Congress has imposed on itself (Budget Control Act of 2011), the Government has three basic options moving forward:

1)  They could simply let the stated law scheduled for the beginning of 2013 go into effect. This draconian, albeit way overdue fiscal budget policy measure, features a number of tax increases and spending cuts that are expected to weigh heavily on economic growth, which would most likely drive the economy back into a recession or even worse. The positive side of taking this bold step, would be that the deficit, as a percentage of GDP, would be cut in half.

2)   They could repeal some or all of the scheduled tax increases and spending cuts, and once again raise the debt ceiling. This would of course add to the current $ 16 trillion mega debt deficit, and demonstrate to the world that the Nation is unwilling or unable to get its unmanageable fiscal budget under control, increasing the odds that the United States could face a crisis similar to that which is occurring in Europe.

3)   They could draw up some middle of the road map, with a combination of moderate tax increases and fewer spending cuts, in a measured attempt to address the run away budget deficit over a longer period of time, which would have a more modest impact on current growth.  The critical issue here is, would this approach be viewed as credible, or simply seen as just another bogus boot of the same proverbial can.

Fiscal-cliffHere is my take on how it will all go down. Obama wins a very close presidential election by a mere 25-35 electoral votes. The Republicans remain in control of the House 240 to 195, and the Senate ends up with a very slim Democratic majority. Basically status quo as far as party control goes, except that the Republicans feel most energized about their unexpected national resurgence, perhaps even winning the popular vote outright.  Leaving BamBam with a much less intimidating mandate club in his puny little hands, then his first swing around. As it turns out, old Flintstone Mitt sure gave him one heck of a run for the money, literally I might add.  

After Bambi’s narrow victory, the market gives him a minor reward, and pops back up towards this years highs. However, once the big eared Asses have finished their obligatory week long celebratory partying, and the Elephants are done crying into their trunks. Suddenly seemingly out of nowhere, equities will reverse course, as the investor class starts pressing the politicians to get their act together on the long term fiscal sustainability of the United States of America.

The market wants a very viable veritable verifiable budget deal on the table now, and wants it fast. After all, we can’t become gonzo gringo goners, like a bunch of goofy Greeks with greedy greased palms.  The S&P will start heading below 1400 in a hurry. The pressure will brutally build big time, for a solid state long term deficit real deal resolution, before the 2011 sexy Cinderella sequester drop deadline of midnight December 31st perilously passes.

The rabid resurgent Republicans feeling their oats, will decide to use the market like a hammer on Obumer’s pin head…..bam…..bam….bam. Pressing the bet for fewer tax hikes and more spending halts. The definately determined demolition crew conservatives will man handle the late night jackhammers, taking the grand bargain vote down to the eleventh hour. Sorry for all the ear piercing noise emanating from torn up Pennsylvania Avenue Mr. President, no soulfully singing merry Christmas carols with Sasha, Malia & Michele this sour Santa season.

The market will make multiple lower lows heading into bawling bare baby Jesus week at sub 1330, and approach the New Year lurching back and forth 30-40 SPX points at a clip, as the law makers continue their decidedly dangerous death deifying dueling debutant dance, nearly wiping out the entire year’s stock gains. Finally, just as Cinderella is about to make her big bad ballroom exit, a marginally magnificent deal is magically struck as the clock strikes twelve, whereby the market maker mavens then surge the intensely ignited indices right back over 1370.  Happy New Year you seriously stressed Slopers!

All is well again in America’s forever fiat fairyland………..or is it………….stay tuned for a superstitious supersonic shit storm in 2013………..Evil Plan 93.0 man the terrifying turbo torpedoes.


     BDI SOH’s Idiot Savant

Slope Of Hope with Tim Knight

Top Trade Ideas for the Week of October 29, 2012: The Rest

Written By: DragonFly Capital

Here are the Rest of the Top 10:

CNOOC Limited, Ticker: $ CEO

CNOOC Limited, $ CEO,is approaching resistance at 210 for the fourth time since March. It has a bullish Relative Strength Index (RSI) and a flat Moving Average Convergence Divergence indicator (MACD) to support a breakout higher. On a move over resistance it has a Measured Move higher to 225 and the 3-box reversal Point and Figure chart (PnF) has a price objective at 266, well above.

EZcorp, Ticker: $ EZPW

EZcorp, $ EZPW, is coming off of a bottom at 18.50. It has a MACD that has just crossed to positive and a RSI that is trending higher. Both support further upside. If it can overcome the doji from Friday it should continue higher.

M&T Bank, Ticker: $ MTB

M&T Bank, $ MTB, is consolidating in a bull flag after breaking higher. The volume structure and RSI falling back from being technically overbought, re-enforcing the flag make it attractive. A break over the top has a Measured move to 109.50 and the PnF has a price objective even higher at 132.

Nuance Communications, Ticker: $ NUAN

Nuance Communications, $ NUAN, is consolidating after a move lower. The RSI is looking as if it may bounce suggesting a reversal with a MACD that is improving. A break of the consolidation higher can move towards the PnF price objective of 36. But a breakdown out of consolidation carries a Measured Move to 20.40.

Spreadtrum Communications, Ticker: $ SPRD

Spreadtrum Communications, $ SPRD, broke above resistance at 22 and is moving higher. The rising RSI and positive and increasing MACD support a continued move higher with the PnF price objective at 28.50. This name also has elevated short interest at about 9% that could help it higher.

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If you like what you see sign up for more ideas and deeper analysis using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits feed and on chartly.

After reviewing over 1,000 charts, I have found some good setups for the week. These were selected and should be viewed in the context of the broad Market Macro picture reviewed Saturday which, heading into next week sees the markets continuing to look vulnerable. Gold is still biased lower in the channel but maybe finding a bottom while Crude Oil looks better lower. The US Dollar Index and Treasuries seem content to move sideways with longer term bias lower. The Shanghai Composite is done with its bounce while Emerging Markets continue to consolidate. Volatility looks to remain low but is showing signs of life. These create a mixed environment for the Equity Index ETF’s SPY, IWM and QQQ, with the Dollar and Treasuries supporting Equities while Volatility and Crude Oil point lower. The charts of the Indexes themselves all are biased to the downside. Use this information as you prepare for the coming week and trade’m well.

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Universities and ‘think tanks”

Via Naked Capitalism comes a heads up from reader Paul Tioxon:

Propaganda on the Rise on the Health Care Policy FrontReader Paul Tioxon sent the following sighting by e-mail. By way of background, it’s important to keep in mind that pretty much every place that professes simply to read research and translate into stuff journalists and the lay public can understand is generally called a “think tank” and they are Trojan horses for policy agendas. It is also worth noting that Leonard Davis founded Colonial Penn, a large insurance company. 

From Paul:
$ 100M annually for 200 fellows for Wharton econ research into health care policy economics at the Leonard Davis Institute.
“Established in 1967, LDI is one of the country’s largest health services research centers with more than 200 Senior Fellows studying the organization, delivery, management and financing of health care.” They have their own “Journal of Health Economics”. They recently hired an Ad Age journalist to head up a group of writers who will translate econ mumbo jumbo for decision makers who need guidance and make health policy.
You can read the blog piece which links to Penn’s announcement which should give you a picture of the kind of policy that goes on there. Nice work if you can get it, huh?

Read more at Naked Capitalism.

Angry Bear

Take Chips off the table? Using Stock replacement strategies!

Since I began this series on discussing strategies which take some investment chips off the table, the Central Bank inspired rally has hit a bit of a speed bump.  During the second week of October the market averages sold off pretty hard.  This proves that markets don’t go higher, forever.  In fact, when looking at the price chart of the SPX index, the rally off the lows on June 1st hasn’t exactly been a smooth ride and may have scared some investors out of the market completely.

Source: OptionsHouse Prodigio

So how can a trader remain in the market without getting shaken out when the market experiences those sudden turns?   Long stock traders may elect to utilize stop orders but run the risk of being stopped out just before the next leg up in a longer term rally.  The other notable risk associated with stop orders is GAP risk.  The stock price may gap through the stop level overnight, not providing the hedge to the downside.  However, options can provide a way to create a dynamic hedge.  Using call options and call spreads as a “replacement” for long stock positions can offer long exposure to the market, while giving the holder a dynamic stop loss price at a predetermined price point.  For investors already long stock in this market using call options is a way to maintain a long position but take some chips (risk and money) off the stock market table.

First the basics:

The risk to a long stock position is the share price may fall – theoretically could fall to zero so the entire purchase price is really at risk.  The risk to a long call position is 100% of the premium paid for the call if the share price is below the strike price at expiration.  This premium is usually a fraction of the full stock price.   This is why this strategy is also known in institutional trading circles as Cash  Replacement or Cash Extraction strategies.

Here’s how using stock replacement works in taking some “chips” off the table.  Using the option delta again is the key to determining the proper strategy.  Exactly the same as the prior two blog posts I wrote in this series on how to remove some risk from the market, the delta of the call will indicate the amount of risk you will have relative to a 100 delta long stock position.   Obviously, a long stock position experiences dollar for dollar profit or loss relative to the movement of itself.  A 70 delta call option however, theoretically moves in price at 70% of the movement of the underlying share price.  If the stock rises 1 dollar a 70 delta call option should increase in market value by 70 cents.  Remember, deltas and all the Greeks are theoretical measures.  The financial models from which they are derived assume that factors such as implied volatility of the options, interest rates and even time are all unchanged and all that actually changes is the underlying stock price when calculating Delta.   Likewise if the price of the underlying stock or ETF falls 1 dollar the 70 delta again implies that the market value of the call option will only fall 70 cents.  So quite simply replacing a long stock position with a 70 delta call will result in 70% of the risk associated with the ownership of stock.

Let’s look at a real life example to measure the costs and benefits of using this strategy.

Apple shares (AAPL) have risen appreciably this calendar year but since hitting $ 700 per share in mid-September have pulled back 10% to close the week at $ 630 dollars per share.  If you have a long position of 100 shares you have $ 63,000 invested in this position.   You could replace your long stock with a long in the money December 590 strike call option.

Source: OptionsHouse

It is a 71 delta option with a premium for 1 contract controlling 100 shares of 58.00 dollars.  Immediately this extracts the difference between what you take in by selling your long stock $ 63,000 – $ 5800 = $ 57,200 (Consult your tax advisor to understand any tax consequences).  However increasing the cash in your account is only one of the benefits of this strategy and not the point of this blog.  We want to pull some chips (risk) off the table and by buying this call we reduce our absolute risk to that of the premium paid $ 5800 from long stock of $ 63,000!  Immediately our risk profile will more closely represent that 71 delta we referred to.  Each dollar move in AAPL up or down we should theoretically make or lose about 70 cents.  Further the delta of this option is not static.  As the price of AAPL shares rises, the delta will increase toward 100 and subsequent price moves will mirror that of the stock.  Should the stock continue to fall, the delta will decrease toward zero – remember, you can’t lose more than 100% of the premium you paid no matter how low Apple stock price might fall.

These benefits are not free.  The $ 58 this option costs has additional time value or extrinsic value relative to the stock price.  The stock is trading $ 630, and the option has a strike price of $ 590.  630-590 is $ 40 of parity value.  The extra premium of $ 18 that this option cost is the extrinsic value.  The stock must appreciate $ 18, or 2.85% in order for this option to be profitable.   Turning this long call into a long call spread can achieve a number of things. It will reduce the amount the shares have to appreciate to become a profitable trade; it also takes some more chips off the risk table, though it will limit your potential gains.  Again nothing comes free in option trading.  For reducing the premium paid by selling a higher strike call you have to be willing to limit the upside profit potential of the trade.

Source: OptionsHouse

$ 700 per share was the recent top in Apple, so you could choose to sell this strike call and receive about $ 10.  This represents over 55% of the extra premium paid for the 590 call and would reduce the amount Apple needed to gain to $ 8 or 1.26% higher from here.  Selling this option will limit the maximum potential gain to the difference between the strikes less what you paid for it 110-48= 62.00 = $ 6200.  Or you could take a bigger slice out of the extrinsic premium by selling the 670 call at $ 17.75.  This almost covers all of the extra $ 18 in premium, but again it limits the potential max gain to 80-40.25 = $ 3975.  You have to look at these max gains vs. your max loss, the total amount of premium paid to get a true picture of return on risk.  The 590-700 call spread you are paying 4800 for a potential gain of 6200 = 129% potential gain.  The 590-670 call spread risks $ 4,025 to potentially make $ 3,975 a potential 98% return.  These are max losses compared to max gains; your actual return may likely be somewhere in the middle.

More importantly look at the delta to determine the best strike.  How many chips do you want to take off the table?  The 700 strike will reduce your exposure another 22% down to 49% (71-22 delta) and the 670 strike would reduce exposure another 34 deltas to only 37 delta (71-34) or 37% of the risk associated with long stock.

Again, this is not a buy, sell, or hold recommendation, but simply an example of how stock investors can use the stock replacement strategy to take some chips off the table on an individual position.  It allows you to remain with positive exposure to the market but in a more risk managed and hedged fashion.

Brokerage products and services offered through OptionsHouse, LLC.

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Related posts:

  1. Chips off the table? Using the Call overwrite.
  2. Take Chips off the table? Using the Portfolio Put strategy.
  3. What fees are associated with short selling stock?

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Romney, Family Business, Carried Interest, and potential conflicts of interest

by Linda Beale

Romney, Family Business, Carried Interest, and potential conflicts of interest

Just a quick note this morning on an interesting article in the October 29, 2012 edition of The Nation magazine, Lee Fang, Romney Family Business: Investors in Tagg Romney’s firm, Solamere Capital, could hit the jackpot if his father wins, The Nation (Oct. 29, 2012), at 18.

Marc Leder, the wealthy investor who hosted the Romney fundraiser last May in Boca Raton where Romney made his comment disparaging almost half of Americans as personally irresponsible and happy to depend on government, is just one of several high-powered investors linked to the Romney family business empire.  The Nation article describes it this way.

In 2008, … [Romney’s] eldest son Tagg and his chief fundraiser Spencer Zwick formed Solamere Capital, a private equity firm …. What Tagg lacked in experience in the world of high finance, he made up for with a vast network of political connections forged through his father, who seeded the firm with $ 10 million and was the featured speaker at its first investor conference in January 2010. …
Unlike most private equity firms…, Solamere specializes in something else:  billing itself as a ‘fund of funds’ with ‘unparalleled networks’, it provides investors with ‘unique access’ to an elite set of other private equity firms and hedge funds.

Solamere, a firm predicated on its founders’ relationship with Romney, presents a channel for powerful investors to influence the White House if he wins.

The looming matters range from general matters that affect all private equity firms–such as tax changes or the new rules mandated by the Dodd-Frank financial reform bill–to more specific concerns relating to businesses owned or controlled by Solamere’s partner firms.   Many of these businesses, in fact, depend on government contracts; indeed, some have been accused of fleecing taxpayers…. A Romney administration could directly affect the profitability of these companies–and, by extension, potentially the success of Tagg’s venture….
Take Leder … whose Sun Capital firm bought a stake in the Scooter Store last year.  The company, known for its ubiquitous television ads promising seemingly free motorized wheelchairs for Medicare beneficiaries, has struggled as the Centers for Medicare and Medicaid Services, the federal agency that governs the programs, implements rules to curb rampant billing fraud.  …80 percent of the claims for scooters and power wheelchairs did not meet Medicare requirements, meaning that $ 492 million a year is being improperly spent.  In 2007, the Scooter Store gave up $ 13 million in Medicare payments and paid $ 4 million to settle with the Justice Department over allegations that it had overbiled for its electric wheelchairs. … Disclosures … suggest that pressuring the government is the only way [Leder’s] investment in Scooter Store can turn a profit.  Since Leder’s firm invested in the Scooter Store, the company has spent nearly $ 900,000 on lobbyists to push back on [the] two latest challenges to its motorized-scooter empire.
Records indicate the firm [Solamere Capital] was incorporated at the same Boston office where Romney’s campaign headquarters had been located, and later shared an office address with Romney’s PAC. Zwick … has been referred to as Romney’s ‘sixth son.’  And by all accounts, he’s one of the most trusted advisers in Romney’s circle. … [I]n February 2008, Solamer Capital registered with the State of Massachusetts. Zwick and Tagg joined with Eric Scheuermann, a former Jupiter Partners executive, as the three managing partners of the firm.  Scheuermann was the only one with prior experience in private equity. … However, success for the firm seemed preordained. … Solamere surpassed its $ 200 million fundraising goal with help from an elite set of ‘high net worth’ individuals, many of whom are close Romney allies. … The three managing partners will receive $ 16.8 million in management fees over the first six years, as well as ‘performance-based incentive’ pay. … A tax return filed by Mitt and Ann Romney, made public in September, showed that Solamere has used an array of Cayman Islands entities … [It] likely uses ‘blocker corporations’ to help its tax-exempt investors avoid paying the unrelated business income tax.
In June, the Romney campaign announced that if he’s elected, the candidate would move his assets into a federally qualified blind trust, and would also likely sell off any assets that ‘are not fully compliant with federal disclosure and other rules applicable to the office of the presidency.’ But if Romney wins, there’s almost no chance that the underlying assets of his son’s firm, Solamere, will be revealed.  Solamere could have assets involved in healthcare, energy, telecommunications or any number of other industries, but the public will be left in the dark.
What is known is that Solamere’s private equity partners are eager to influence the federal government. Three of the firms listed in the Solamere prospectus–Sun Capital Partners, TPG Capital and TA Associates–are currently financing a lobbying campaign under a trade group called the Private Equity Growth Capital Councill (PEGCC), which is seeking to influence a number of tax and regulatory decisions.  The PEGCC has spent nearly $ 5.8 million on federal lobbying over the past three years, and untold millions this year on a public relations campaign in swing states to improve the image of private equity–a strategy seen as designed to benefit Romney’s campaign. One of the primary concerns of the PEGCC … is that the carried interest loophole, which allows wealthy investment managers to be taxed [on their compensation for services] at only the 15 percent capital gains rate, may be closed. The group has also …held meetings with regulators to complain about the Dodd-Frank financial reform bill’s mandates.
Other Solamere investment partners own businesses that face imminent regulatory action [including SCF partners, Rockwater Energy Solutions, and IPS Canada].
Meanwhile, HIG Capital–one of the largest Solamere partners, with nearly $ 10 billion of equity capital–owns a number of other firms that are closely monitoring the federal government.  One area where private equity firms have made lucrative investments is the new industry of dental management companies that bill Medicaid.  In November 2011, Senators Chuck Grassley of Iowa and Max Baucus of Montana opened an investigation in response to allegations that these corporate-controlled dentists have abused children.
The Medicaid reimbursements for the dental management companies offer a revealing look at the underlying business model being pursued by the Romney-supporting private equity firms:  big government, when harnessed to industry-friendly regulators, can mean big profits. Many of these private equity-owned companies rely on federal and state contracts, from HIG Capital’s Hart Intercivic, a voting machine company, to EnviroFoam Technologies, a biological and chemical decontamination firm that does business with the US military and is owned by Peterson Partners, a private equity firm listed in the Solamere prospectus.
Asked about the rising cost of colleges …, Romney said that students should take a look at for-profit colleges like Full Sail Uniersity …. Weeks later… Romney hailed the ‘advent of for-profit institutions of higher learning’ for providing competition with public and private universities.  He again volunteered Full Sail University as a good example of how students can ‘hold down the cost of their education.’
What Romney neglected to mention is that Full Sail University–in fact the third most expensive college in the United States–is owned by TA Associates.  Indeed, TA Associates has viewed the for-profit college industry–a $ 40 billion maker where 85 percent of the funds are supplied by taxpayers–as an excellent opportunity for growth. …Like most profit driven colleges, which account for only 10 percent of all students but about half of all loan defaults, TA Associates’ schools do not boast a stellar track record.
‘The fact that Romney praised an overpriced, underperforming college that is owned by his son’s investment partners, and whose owners have contributed a quarter-million dollars to his campaign and Super PAC, shows how he embodies the corrupting influence of money on politics,’ asserts David Halperin …. ‘It shows how his administration could, as a matter of course, allow special interests–the interests of his rich friends–to skew important policy decisions and harm the public interest.’ Id (emphases added).

The article goes on to discuss how closely Solarmere and its investors are intertwined with the Romney campaign.  Tagg is a part of Romney’s inner circle.  Solamere holds an investor conference that happens to coincide with a neighboring fundraising event for the campaign.  American Crossroads, Karl Rove’s Super PAC engine of radical GOP ideas, attends both.  The Super PAC can’t coordinate with campaigns, but the fundraising is hosted by Solamere so that makes it okay, technically.

This excerpt thus amply illustrates the way class warfare really works:  a closely knit group of oligarchs with business ties through their private equity empires and a shared corporatist perspective on society can use insider access to the channels of government power to make government work for them and prevent its working for ordinary folk.

First, money speaks loudly, so legislation tends to get passed that favors the elite or gets blocked when it disfavors their special interests.  Ending the carried interest loophole can’t make it through Congress, even though there is a wealth of commentary condemning it as an inappropriate subsidy for an industry that is often destructive to the economy.  Hampering the EPA’s ability to safeguard wildnerness lands or healthy air and water is easily accomplished.  Insider information, influential networks among oligarchs, and intimate acquaintanceship among executives in government and corporate executives ensures the smooth flow and fit of wishlists and accomplishments.

Second, with their focus steadfastly on their own rentier profits from their vulture businesses, oligarchs refuse to support measures that are important for the commonweal, and urge the passage of measures that have harsh impact on ordinary workers.  Offshoring is praised as a “creative destruction” even though compensating creative innovation seldom offsets the costs of worker loss, community disintegration, and economic decline.  Unions are viewed as hostile opponents (because the more money that goes to workers in respect of their real work acomplished, the less can be skimmed off the top by vulture capitalists), and hence much of big corporate money is targeted to eliminate collective bargaining rights that protect workers.

Note that this is always just one of many blows from private equity’s leveraged buyout methods, since the use of excess leveraging for quick profits to the private equity managers builds up debt that sucks out cashflow and either provides justification for reduced wages to workers from a barely stable industry or provides justification for a bankruptcy process through which the company’s pension obligations to its retired workers can more easily be scrapped (even though it could have met them if it had only treated them as important as its payouts to overpaid managers).

cross posted with ataxingmatter

Angry Bear

Technical Picture – Tech Wreck Weighs on Broader Markets

The chart above shows S&P sector performance since the return from labor day weekend.We see that while technology fell 5%, financials spiked by 5%. Most sectors are positive so it is difficult to determine if the weakness in technology will spill through to other sectors and result in a sharper correction for the broader markets.

The next chart is a 20 year monthly chart of the ND.  Here we see that large cap tech stocks have retraced 50% of the tech bubble highs. This is the second rejection, the first being in April 2112, and the second in Sept. after briefly, breaching the 50% level.

The next chart is the daily ES, NQ, and YM futures.  As I wrote on Thursday, the NQ was going down to 2675.  By the end of the day we blew below that level.  Yet, the broader markets are still holding the neckline of the extension long levels.

I see a lot of support at NQ 2657, which has traded Sunday evening. ES needs to hold neckline support. I noticed that both ES and YM are coiling (red dots on the TTM squeeze indicator).  The red dots precede price expansion.

Tech earnings will be in focus again this week as AAPL reports on Thursday after the close.

AAPL reached my preliminary target EOD.  If price continues lower tomorrow morning, we will likely have extension shorts from the previous low $ 623.55 to new lows.  If price holds the -23.6 level, we’ll use same anchor 682.62 to 609.61 to determine the next Fib. retracement.

Some of the widely held names reporting earnings this coming week include:


Wall St. Warrior

Small Oil and Gas Business Faces Uncertainty in Price Action Too

Written By: DragonFly Capital

In this election season there has been a lot of discussion about small business and the uncertainties they face. There are a few of these small companies in the Independent Oil and Gas space that have charts worth noticing that are in that situation.

Cabot Oil & Gas, $ COG

Cabot Oil & Gas, $ COG, broke above resistance of a quadruple top in early September. After a brief fall back below it rose and is now consolidating over that support at 44.35 It continues to have a bullish Relative Strength Index (RSI) and the Moving Average Convergence Divergence indicator (MACD) is moving back towards positive after a small dip. The key to this is a move over the consolidation at 46. That would carry a target of 49.50 on a Measured Move and continue the uptrend. A drop under 44.35 puts that on pause.

Callon Petroleum, $ CPE

Callon Petroleum, $ CPE, has been moving higher off of a Tweezers bottom at 3.80 and is currently building a bull flag. A break above the flag at 6.25 carries a Measured Move to 7.50. With the MACD stalling and the RSI bullish but falling wait for the break. A move under 5.75 kills this trade.

Forest Oil, $ FST

Forest Oil, $ FST, also moved up from a bottom in July and after a recent pullback, confirmed a move back higher over the bull flag. The Measured Move higher takes it to 10 but it is showing topping candles before reaching the previous high at 9.32. The Doji Tuesday could resolve either up or down and to the upside gets you long. The downside puts this trade on pause.

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Updating October TICK Volatility and Levels for Intraday Traders

If you are an intraday trader and use the NYSE (or related) TICK indicator in your trading decisions, it’s very important to calibrate important TICK Levels with respect to volatility.

In simple terms, a TICK Value of 1,000 means different things during periods of high or low broad market volatility, and you can easily make mistakes if you don’t adjust your strategies to the current levels.

Let’s take a look at the current TICK Volatility Charts and compare current levels to the last few years.

Here’s the NYSE TICK Highs (blue) with a 20 day Simple Moving Average as a smoothing factor:

If you use the NYSE TICK in your intraday trading decisions, you know that the TICK itself mirrors broader stock market volatility, at least in terms of intraday TICK highs and lows.

For reference, the NYSE TICK calculates the number of NYSE issues ‘ticking’ up at a given moment minus those ‘ticking’ down.

It’s helpful for intraday traders to note short-term overbought or oversold situations as well as pinpointing divergences with intraday price highs and lows.

Some traders even design strategies to take profits on a buy/long trade when the TICK registers a certain level, like +1,000 or even take a short-sell trade on a perceived high TICK reading (again, like +1,000).

The same logic applies to exiting short-sold positions or perhaps putting on long/buy positions with a perceived low TICK extreme like -1,000.

The often overlooked problem with these strategies it that a fixed/permanent TICK value of plus or minus 1,000 means DIFFERENT things at different times.

What we’re seeing in the blue TICK chart above is the NYSE TICK Highs (+1,300, +1,400, etc) and then a 20 period moving average (black line) of these highs.

I placed a horizontal line at the famous +1,000 TICK level.

It is clear that there are periods where the 20 day (roughly one month) average tracks well above 1,000 (especially during sharp sell-offs) or even under 1,000 (during periods of low volatility ‘creeper’ trends).

If we use a simple strategy of exiting intraday long/buy positions when we see a +1,000 TICK reading (or initiating a new short-sell position), we see two clear problems that can occur:

When the Average TICK High runs above +1,000…

  • it suggests that we’ll be taking profits too early because the TICK continued  to rise a higher level.
  • taking a short-sell position when the intraday TICK registers +1,000 can lead to instant losses as price (and TICK) continue pushing higher.

A lesser-known problem would be the fact that exit signals would not occur, nor would new short-sale signals trigger, if the intraday TICK high never reached +1,000 as would be the case when the average TICK high (or low) is beneath the popular 1,000 level.

The same logic is true when assessing intraday TICK Low extremes:

If we use -1,000 as a fixed “extreme” TICK Low, then this does us a disservice when the average TICK ‘extreme’ low changes as a factor of broader market volatility.

In other words, one must adjust TICK-based strategies to account for cyclical changes in market – and TICK extreme – volatility.

To keep up with this on your own, simply plot the NYSE TICK on a Daily Chart and create a 20 day (or related) moving average of the TICK Highs and the TICK Lows.

Note persistent extremes in the TICK as a factor of low or high broad market volatility.

The highlighted regions show periods of high market volatility and thus lower TICK lows (extremes) while the blue zone highlights a period of low average TICK extremes during the creeper-uptrend at the transition from 2010 to 2011 (during QE2).

We’re in another period of low stock market volatility and thus low average TICK extremes on both the intraday highs and lows.

For reference, the 20 day Average TICK High (extreme) is currently +918 and has been under 1,000 since early August.

The 20 day Average TICK Low (extreme) is currently -843 and has remained under -1,000 since late June/early July.

Continue following along with similar charts and adjust any intraday TICK strategies accordingly.

For more information, feel free to read prior updates on this topic:

Corey Rosenbloom, CMT
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OptionsHouse and mPower Announce Licensing Agreement

OptionsHouse and mPower Trading Systems today announced an agreement whereby OptionsHouse will be the exclusive licensee of mPower’s Prodigio RTS trading system.  The agreement will provide a clean transition and a high-performance technology platform for OptionsHouse and Prodigio active clients.

“We are pleased to partner with Prodigio to provide our clients with new trading tools aimed at supporting their trading decisions.  Expanded functionality such as back-testing and program trading will help our clients mitigate risk, generate trade ideas and inject more discipline into their investment strategies,” said George Ruhana, CEO of OptionsHouse.  “We are focused on providing great value to our customers.  We already provide some of the lowest, most competitive rates in the industry and the addition of Mpower’s technology will expand our capabilities to provide customers with even more sophisticated tools for trading strategy and idea generation.”

Jim Bell, Managing Partner of mPower, said, “As one of the fastest growing online brokerage firms, OptionsHouse is a proven leader in leveraging its talented personnel and unique technology to drive enhanced trading decisions.  We are delighted to partner with them to bring to market the kind of institutional grade technology and client service that serious investors demand in today’s rapidly moving markets.  We look forward to working together to enhance OptionsHouse’s leadership position in the self-directed online services industry.”

About mPower Trading Systems

mPower Trading Systems through its Prodigio RTS technology designs, writes and develops proprietary, expert level automated trading systems.  With experience spanning over two decades, mPower was founded in 2003 to embrace the challenge in delivering complex powerful analytic and algorithmic trading technology to retail, professional and institutional self directed investors. mPower Trading Systems combines the best in practical financial market knowledge with some of the most elite quant developers in mathematics and computer science to create Prodigio RTS (robotic trading system), recognized as one of the most pre-eminent automated robotic trading system available today.


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