Three obvious reasons to watch 13,000 on the TSX

Talks of QE2 (WSJ: QE2 or Titanic and Econbrowser: Why is the Fed doing this?) and earnings season are pushing the market higher and higher. Gold is still pushing to new all time high and the dollar is breaking to new lows. The TSX, in particular, is testing 12,700 today. 13,000 is just around the corner. 13,000 price level is the line in the sand for the commodity-heavy TSX for three obvious reasons.

  1. It marks the breakdown support level back in the 2008 crash.
  2. It is the bottom of a prolonged congestion zone in much of 2007 and 2008 before that crash.
  3. And most importantly, #1 and #2 are very easy to spot on the chart (potentially self-fulfilling).

It is likely that the TSX will be reaching 13,000 shortly in this earnings season. However, what happens afterward is anyone's guess. At this point, I am neither long or short for the long term. The reward/risk isn't good for going long at this point with that much uncertainty. And the threat of QE2 and earnings release isn't good for going short either. I am watching the forex market closely for signs of a direction as that is a driver of the equity market these days.

[caption id="" align="aligncenter" width="570" caption="S&P TSX"][][][/caption] [caption id="" align="aligncenter" width="570" caption="CBOE Market Volatility Index (VIX) vs. inverse S&P500"][]1[/caption]

Posted 13 October 2010 in stocks.

Still waiting on the sideside in my RRSP

As much as I rant about trading and forex, a big portion of my investment funds are in a Questrade RRSP trading account for the long haul. However, that account has been dormant for a few weeks now. The money is just sitting there, not even making any interest. The reason is that I am just not seeing any long-term opportunity on either long or short just yet. Even though the month of September started well after Labour Day, as the market is inching higher, the long term picture is still unclear. Figure 1 below clearly shows that not much has really happened for the whole year. There was a lot of volatility as TSX swings up and down a thousand points now and then. Evidently, a buy-and-hold strategy wouldn't have been doing too well this year. As such, I am waiting with no position in hand. At least I'm not going all out shorting the equity market anymore.

[caption id="" align="aligncenter" width="570" caption="TSX weekly chart"][][][/caption]

To hell and back? A review of TSX after a V-day

As every trader knows already, the Dow tanked 1,000 points (about 9%) in like 15 minutes today. But what's more amazing is that all the indices made their way back just as quickly. Figure 1 below is today's chart of TSX Composite (blue) and S&P 500 (red). So what does this mean for TSX?

TSX Composite and S&P 500 Let's zoom out to take a look at the big picture. Figure 2 is a weekly chart of TSX. The top indicator is the percentage of TSX traded issues above their 200 day moving average. The overlay indicator is the percentage of TSX traded issues above their 50 day moving average. The lower indicator is the percentage of issues above 200 MA divided by the percentage above their 50 MA.

[caption id="" align="aligncenter" width="570" caption="TSX Composite"][][][/caption]

The TSX index is an aggregate of prices from a handful of companies. But there are over three thousand issues trading on the TSX. This view of Figure 2 provides another perspective of where the market stands.

The question to be answered is this, how much technical damage did today's sell-off produce?

Not much apparently.

Coincidentally, both the 200 and 50 numbers are at their respective support after the close. This is as low as we have been in the past 9 months or so. However, they are still hanging high above according to the 200 percentage. There are still 56.5% of companies above their 200 day moving average.

On the shorter term though, the 50 number is pretty low at 30%. Only 30% of companies are above their 50 day moving average.

Referring to the historical pattern as shown on Figure 2. Typically numbers 30 or below means that the down move is exhausting. Since most (70%) companies are trading low already, so there's not much room for big dives until the market can reload. It is interesting that we touched 30% this week yet the TSX index is still not down that much in the big picture.

Don't get me wrong, I am still bearish on the market in the long run. But I don't think today's move is the beginning of the dive. Since volatility has contracted to a recent record low, this move is just a shake-out of the bulls. Is this the end of this down move? I don't know. But I expect to see at least an opposite shake-out of the bears soon before any real move can materialize. Control your risks in expectation of big ups and downs in the near future.

It's just too good to be true for the bears that the market makes a U-turn and head straight down after congesting below a support level for weeks.

In terms of my trading, I'm all cash today. So it was fun to watch the move with no strings attached. I covered my CVE.TO shorts yesterday at a decent price. CVE.TO broke down further today during the panic but ended up closing slightly higher. So my exit was good as I couldn't have covered during that rapid breakdown.

P.S. Mish offers a good brief on today's extraordinary move.

Posted 06 May 2010 in stocks.

Sold 12 CVE.TO Puts @ 2.90 Mark $27.50, +10% gain

I closed my short Cenovus Energy (CVE.TO) position this morning as crude oil broke below \$80 briefly and the Dollar Index rose above \$84. Myoriginal target was \$27 for this short. But considering the fact that I mistakenly doubled my position size, I am closing this trade a step above at this \$27.50 support level (see Figure 1 for CVE.TO support lines). Furthermore, the time decay on the options premium is accelerating so I needed to sell this soon. The final profit on this position is \$858.15 (after \$63.80 commission), or just over 10% in my RRSP account. Although this trade is profitable, it is a horrible trade for the following reasons.

[caption id="" align="aligncenter" width="570" caption="Cenovus Energy (CVE.TO)"][][][/caption]

  1. I accidentally bought more contracts when I intended to sell.
  2. Not correcting my mistake immediately.
  3. I risked too much at 3% (of account) initially and then 10% after my mistake.
  4. Peak drawdown was over \$1000 (12.5%) at one time.
  5. Too eager to add to my position once it moved.
  6. Reward-to-Risk ratio is less than 1.0, so I threw big money for smaller gain.
  7. Commission ends up eating 7% of profit away. That is too much.

As you can see, I made one, two, ... seven too many mistakes in this trade. Luckily, I did manage to do some things right.

  1. Patience. There were a few days when the price moved sideway. I didn't succumb to my emotions and dump the shares when it was nerve whacking to hold onto a loss. The price was still below my mental stop so I held.
  2. After the initial shock of doubling my position as the price moved away, I mentally accepted my loss and was able to study the market objectively since.
  3. Didn't take profit too early once the price moved back in my favour this week.

I won't be as lucky every time. Learn from my mistakes and exploit on my strengths. That is the lesson from this trade.

Posted 05 May 2010 in stocks.

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