Post-market Analysis December 10, 2008

Occasionally, my accuracy in predicting trading ranges amazes even myself. Today is yet another example. In the morning, I opined that breaking above 910 is bullish and breaking below 885 is bearish. Today’s S&P traded a high of 908 and a low of 885.

Aside from my existing intermediate term long positions, I am effectively neutral-bullish for the short term, and still bullish for the intermediate term (as we’re still in my bullish channel as shown in Figure 1).

e-mini S&P 500

What do I mean by neutral-bullish? Although the current rally seem to be losing steam and there are still many skepticism, the market internals still seem strong to me. Notice yesterday when S&P tested 885 in Figure 2, the TICK made a low of -1426 and the Advance-Decline line was about -80. When we tested 885 today again, the TICK remained above -1000 and the A-D line was at about +80. This is a textbook perfect bullish divergence scenario.

Frankly, I have been waiting for signs of this rally to break down these couple of days. So far, I haven’t been able to spot anything concrete. Until that happens, I’m happy to ride up the stream on this shaky boat.

S&P 500 and NYSE internals

SOLD -100 DRYS @11.1103

Sold half of my DRYS today @ $11.1103, which I bought for $5.33. This is just to get my principle back on this first sign of weakness in this rally. We tested the resistance at $12 this morning on historic volume. I think we will break above $12 eventually. That’s why I’m still leaving the other half of my position in the game.

What’s more concerning for me is the broad market itself. We are still struggling to break 900 and hold on to it. From Figure 2, we see that the market (S&P) is in the middle of an important channel right now. Breaking above 910 is good. Breaking below 885 is bad. We are definitely in a trader’s market these days, so buy-and-hold isn’t a strategy to use now. And since it’s unclear to me which direction we’ll be heading. I feel safer to cash in my principle in DRYS now as it’s a highly volatile stock. I believe it will go up, but I can’t dismiss the possibility of it heading back down.

Now that my DRYS position is effectively free money, I can ride it out if it becomes choppy from now on. After rocketing from $4 to $12 today in like a week, I can’t expect DRYS to keep pushing in one direction even if I expect it to go up.

DryShips Inc.

e-mini S&P 500

Pre-market Analysis December 1, 2008

Last week’s rally in S&P still haven’t broken the big downtrend from Sept/Oct yet. In fact, we just tested the top of the trend and bounced back perfectly. If we break below 860/850 on the S&P 500 today, then I’ll be looking down for the day. Breaking above 895 would be a great sign. And staying around 890 would be good too, as it shows we’re at least able to hold on to the gain.

However, do note that after such a quick rally last week. It is entirely normal to retrace back to load the gun. I plan to hold on to my intermediate term longs today.

The Asian market are all red overnight, except the Chinese markets. Shanghai (+1.25%), Hang Seng (+1.59%), and Taiwan (+1.30%) managed to stay just above even. As the Chinese market is very important in the global recovery, things aren’t all bad in Asia last night. However, I would simply read this as a neutral sentiment as everything else were down as I said.

S&P 500 futures

The US Dollar Index is bouncing back up again. However, it is still within the downtrend we’re in. I wouldn’t worry too much until it breaks 87.50. If that happens, it would be another sign this rally is losing steam.

US Dollar Index

Gold is retracing after the speed climb last week. I would watch the fibonacci retracement level at 50% (780) and 62% (770) for important signs of retracement confirmation.

Gold

Bought +7 SKF @149.65 And Stopped out @ 144.58

I bought some SKF today after being stopped out of DUG to hedge my longs. The low volume in the market made me believe this rally would not follow through. In addition, the difficulty of S&P to test 870 looked like a good entry point at the time, Figure 1. Citigroup was also struggling to break $7.00 even though S&P made a slightly higher high. So I was worried about taking a hit for my longs if we’re to go down from here. That’s why I made a position in the ultrashort. SKF looked good because $150 seemed like a good support and the financials are the banes of this crash so far.

In hindsight, even the channel on SKF, Figure 2, shows we are in a downtrend for SKF, so up for the market.

I picked up SKF at 14:28 and was stopped out at 14:54. The reason for my exit was C breaking above $7 and then kept on making new highs. My mental stop was at $145 too. I kept myself out for the last hour promising that I would not enter short again unless C can stay below $7. That never happened and C closed at $7.05.

NYSE/S&P internals

Ultrashort Financials

BOUGHT +200 DRYS @5.33

DryShips Inc.

DryShips Inc.

Commodity Index Fund

Claymore/Delta Global Shipping index

Upside:

Figure 1: Reflection from middle of downtrend from 09/23 and breakout of short term downtrend from 11/05.

Figure 2: Good volume testing $5.40 (long term resistance from Figure 1), volume more than previous $5.40 level from 11/19. Stochastic and CO early positive turnup on the daily.

Figure 3: Daily DBC (Commodity Index) showing positive divergence on stochastic. MACD neutral but slightly positive. Weekly DBC positive divergence on all thee, Stochastic, MACD, and CO.

Figure 4: SEA (Global Shipping Index) moving up.

Resistance: minor one at $9, then primary from $12 to $25. Once it hacks through those, it’s clear sailing up.

Downside:

$2.9 billion of debt! Market cap is only $250M! 1.356 debt/equity ratio. However, that’s in-line with other shipping company, and much less than the bigger players such as FRO (over 5.0 debt/equity).

Figure 1: DRYS still within multi-week downtrend channel. We could test $9 and bounce back.

Figure 2: Daily chart positive signals not confirmed yet.

Figure 3: Short term could still see some chopping down on commodity prices.

Figure 4: Lots of resistance up ahead for SEA.

Support: $4 and then all time low of $3.

Bottom line:

Good risk/reward ratio and studies show positive divergence. I hope to ride this up for at least the intermediate, if not the long, term.

On another note, I wanted to purchase the options strangle to hedge this trade, but the premium were so high today that I opted for the cheap shares instead.