Auto bailout shakeout December 13, 2008

To bail. Not to bail. To bail. Not to bail. Friday's market gapped down big time on news the bailout failed to pass the senate on Thursday night. Then just hours later, rumours were surfacing about the White House stepping in with the TARP money. As of Saturday, FP headline reads White House holds off on auto bailout.

Since I'm no economist, I am not going to discuss about the auto bailout here. What matters to me is the market. As I was saying, the market gapped down Friday morning and even touched 851 in the first few minutes. However, it hacked its way back up to close positive at 879.73.

We managed to hold this critical 850 support level as I noted in Thursday's post-market analysis. However, I wouldn't want to add to the longs at this point because both of my uptrend channels have been broken. I feel that at this point, it is safer to watch and be more late into a trend than usual.

Specifically, I would like to see the S&P 500's behaviour around 860 or 900 (Figure 2), which ever comes first, before adding to my existing positions.

[caption id="attachment_971" align="aligncenter" width="500" caption="S&P 500 ETF"]S&P 500 ETF[/caption]

[caption id="attachment_972" align="aligncenter" width="500" caption="e-mini S&P 500"]e-mini S&P 500[/caption]

On a more personal note, my stops for DRYS and SKF were triggered on Friday.

On December 12, 2008 8:30:32 AM, my -\$1.0 trailing stop for DRYS were triggered (stop at \$7.90) and my last 100 shares were sold for a basement price of \$7.34. I have definitely been a victim by the market makers gunning for stops. As DRYS pushed higher throughout the day and closed at \$9.37 on Friday.

As I'm actually away on a trip for these few weeks, I don't think I'll re-enter DRYS until it clears the resistance at \$12. I simply cannot watch it as close as I would like.

In any case, I already unloaded half my position previously at \$11.11. So although I feel I've been ripped off with my stop, I believe this is overall still a good trade because I unloaded on strength and have set a reasonable (using my channel) stop just in case it turns back down on me while I'm away.

[caption id="attachment_973" align="aligncenter" width="500" caption="DryShips Inc."]DryShips Inc.[/caption]

My Ultrashort Financials (SKF) stop was triggered on Friday too. This one I am a little dumbfounded. I have set my trailing stop at -\$17 on the mark for SKF. The stop price of \$124 was triggered and my 7 shares were sold for \$124.09. Having bought at \$128.83 the previous day, this is a small loss.

Notice that giant opening spike in the chart below? This is yet another example of the market makers gunning for the stops. I believe I should have set a hard stop instead for this one since I'm using it as a hedge.

[caption id="attachment_974" align="aligncenter" width="500" caption="Ultrashort Financials (SKF)"]Ultrashort Financials
(SKF)[/caption]

This is still a trader's market. Since I'm away oversea, I can't manage my account as effective as I would have liked. Setting the trailing stops was a safety measure. Although they worked against me this time, I still think it was a good decision given my circumstances.

Anyway, I am at 50% longs now with no hedge (not good). My other 50% is in cash. My primary short term goal now is to seek out a good short entry to hedge my longs. I don't think I have the guts to add anymore longs until I see more strength in this rally.

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.

[caption id="attachment_951" align="aligncenter" width="500" caption="DryShips Inc."]DryShips Inc.[/caption]

[caption id="attachment_952" align="aligncenter" width="500" caption="e-mini S&P 500"]e-mini S&P 500[/caption]

BOUGHT +200 DRYS @5.33

[caption id="attachment_926" align="aligncenter" width="500" caption="DryShips Inc."][DryShips Inc.][][/caption]

[caption id="attachment_930" align="aligncenter" width="500" caption="DryShips Inc."][DryShips Inc.][][/caption]

[caption id="attachment_928" align="aligncenter" width="500" caption="Commodity Index Fund"][Commodity Index Fund][][/caption]

[caption id="attachment_932" align="aligncenter" width="500" caption="Claymore/Delta Global Shipping index"][Claymore/Delta Global
Shipping index][][/caption]

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.

[DryShips Inc.]: http://traderpau.files.wordpress.com/2008/11/2008-11-26-drys.png [DryShips Inc.]: http://traderpau.files.wordpress.com/2008/11/2008-11-26-drys_ta1.png [Commodity Index Fund]: http://traderpau.files.wordpress.com/2008/11/2008-11-26-dbc.png [Claymore/Delta Global Shipping index]: http://traderpau.files.wordpress.com/2008/11/2008-11-26-sea.png