It's Logical

Time for a rally before another big fall...

Yesterday I posted a followup on MarketHistory to the idea I've been following that the stock market, represented by the Nasdaq Composite Index, has been tracking in analogous fashion, the movements of the Dow Jones Industrial Average leading up to and following the 1929-1937 which showed the great bull market leading to the peak in 1929, and the crash into the Great Depression afterwards. Based on that analog, on October 11th I suggested to a colleague in an email that I thought the top had been reached that day. This chart shows that this observation was correct:

The next day I published this observation on MarketHistory.com, and followed up with a post on this blog to the same effect.

Here's the updated analog chart. Based on this analog, I think the markets may have a sharp rally from here, but after that, it looks like we may be in for a big fall:

Nasdaq-Dow Analog - The Top Has Been Reached

I firmly believe that the U.S. Equities market top last week on Thursday is of a long term nature and that we are about to enter a one to two year bear market in U.S. equities.

I have been closely following the zig-zags of the recent Nasdaq market compared to the Dow during the period from 1924-1937, as you can see in the chart below, and last week it appears that the ultimate top in 1937 lined up with what could be a major top for quite some time. As you can see from the charts, if history repeats, or even rhymes, we will have a rough road ahead.

Here's an updated chart of the analog between the Dow in the 1930s, with the peak of the 1929 high synchronized with the 2000 peak in the Nasdaq Composite Index:

You can also read this trading idea on MarketHistory.com

Dow 1930s versus Nasdaq in the New Millennium

When the market declined over 3% one day back on February 27, I mentioned that I thought that this was not the beginning of the end for the stock market….not just yet.

One of the reasons why I said this is the road map that I have been using to guide me to see the "big picture": an overlay of the DJIA from January 1, 1924 with that of the NASDAQ beginning on August 1, 1994.

As you can see from the chart, these patterns are similar, and the NASDAQ "crash" that occurred in 2000 was very similar to the stock market crash in 1929. Also, as you can see, so have the recoveries after the crashes. This roadmap shows continued strength for some time yet, and as I mentioned back in February, I do not see any significant downturn until this Fall. That is the time to start to be wary, and I would even lighten up or get entirely out of the stock market by the end of August. It used to be that Octobers were bad months for the stock market. However, in recent years, people have been conditioned to buy stocks in this month, and they have been duly rewarded for doing so.

I think that this year will be different.

Stock Market Lunacy - Have the Bulls Been Eclipsed?

If you watched the news over the weekend, there was a total lunar eclipse on Saturday evening. Since it was cloudy here in Chicago, I did not get a chance to see it.

Since the stock market crash in 1987, I have always been leery of full moons and aware that sometimes they coincide with large smashes in the market. But, I was quite surprised to learn over the weekend, playing around with my Market Information Machine, just how bearish a total lunar eclipse is, if preceded by a week of weakness in the DJIA similar to what we experienced last week.

Q: How has the Dow Jones Industrial Average (DJIA.A) performed in the past when it has seen a decline of 2.5% or more in the week preceding a total eclipse of the moon?

A: Although there are not many occurrences (6 prior ones) of the DJIA declining more than 2.5% in the week before a total lunar eclipse, in every single case, they are bearish for at least four months after this event, with the average decline being around 11%:

EventEdge indicates that DJIA.A has shown a very strong bearish edge that peaks 74 trading days after the event. DJIA.A declines in 100% of the cases (6 of 6) by an average of -11.8% relative to the close on the event date:

I actually do not think that the season is ripe for a super huge smash in the market as they usually occur in the Fall, and I had been expecting some significant weakness this Fall, not now. Also, if interest rates keep falling, then I will soon get a major buy signal based on this, and I will let you know when and if this happens. In any event, I still like HSY and owning the August 55 calls. If things do get ugly, it is good to be long a good defensive stock such as this one. Food stocks and utilities should hold up better than other stocks. People need to eat and they need electricity!

This trading idea is also published over on LIM's market history research website, MarketHistory.com. You can see more details about this trading idea there.

Cold Weather Freezes Orange Juice Demand?

Back in December, when we were experiencing super warm weather, I suggested a natural gas short trade for a 5 day period. This 5 day period saw one of the greatest declines in natural gas for the year.

Now, what to do when the weather is so very cold?

The answer is not obvious at all, but when you think about it, makes perfect sense: When you wake up like me on one of these frigid days in Chicago, where we have seen the temperatures below zero for many consecutive days, you may reach for a hot cup of coffee, but you may not even think about drinking an ice cold orange juice.

Sure enough, when I checked out the facts with my Market Information Machine, I saw that when it is super cold in Chicago in January or February (as defined by 5 consecutive days where the low temperature In Chicago is less than zero, then there is a high probability that orange juice will decline over the next four weeks. The average decline is almost 10%.

Looking out farther, we see the peak of the bearish edge occurs 53 trading days later. According to the 8 previous occurrences of this event, EventEdge indicates that JO has shown a very strong bearish edge that peaks 53 trading days after the event. JO declines in 100% of the cases (8 of 8) by an average of -14.1% relative to the close on the event date. This edge can be seen in this chart, which plots the return of the Orange Juice futures (rolling to the next contract in the series as needed) looking forward from the event date.

So, I’d go short the OJ futures outright, using the July series (the March contract will expire on Friday, February 16,  so I would stay away from playing this month) or buy the 180 July puts which are trading at around $8  (translates into about $1250 per option contract).

You can’t do anything about the weather, but you certainly can profit from it. For more history based trading ideas, and for the research tools you can use to find them, check out LIM's MarketHistory.com, which uses the Market Information Machine (MIM) to perform this sort of research.

Buy the Chocolate Dip

Hershey released earnings this morning, and The Street did not like what it heard. (65 cents versus an estimate of 71 cents). The stock is down over $1.87 at this writing to $50.50. I view this as a buying opportunity.

Both cocoa and sugar, especially sugar, have been coming down in price recently, and this bodes well for the future. Also, I like all the new product innovation that the company is showing.

The biggest reason of all for getting in today is that starting from the close today, the day that HSY reports first quarter EPS, to the close 16 trading days later (Feb 16 in this case.)  HSY has always been up since 1993. MarketHistory.com analyst Mickey Schoenhals featured this bullish tendency in Hershey in a trading idea published on that site this morning.

You can buy the stock with a stop loss of $47.79, and risk a few points, or if you want more leverage, I’d buy the August 55 calls, currently trading at $1.15. I think by August HSY could touch $60 and then these calls would be worth around $5. I really like the long term pattern that HSY has made, but it may take a while for the stock to gather steam. That is why I would not mess with any near term options, despite the good 16 day start that you may get.

If the stock does indeed pop up over the next 16 days and you can get near $3 for the calls, take the money and reload on yet another pullback. This stock trades in fits and starts, and it is good to take a very quick profit if you are fortunate to get one. 

IBM Earnings Analysis

IBM just came out with earnings, and the Street did not like the 11% increase in profits. IBM is trading in after hours at $93.70 right now, down around $6.

As I mentioned in my earlier IBM January 95 call buying strategy, I thought that IBM would not simply cruise through $100 on its first attempt, and that profits on your call purchase at $1 to $1.50 should have been taken at $4.40 level had you gotten into the trade. This chart shows what IBM has done since we made this call.

These calls went on to trade as high as $6; however it looks like these calls will expire worthless tomorrow. You have to know when to take profits, or POOF, you can lose your shirt!

For a look at how IBM performs after historical earnings releases, see the chart below. For a full analysis of IBM's performance leading up to and after earnings announcements, see MarketHistory.com's Earnings Edge analysis of the stock (subscription required.)

IBM Option Trade Followup

IBM was up over $1.00 per share on Thursday, and the January 95 calls that I recommended that you purchase at between $1 and 1.50 a while back traded at my recommended exit price of $4.40. If you took my advice, you have a tidy profit. Congrats!

Warm Weather Creates Natural Gas Trading Opportunity (UPDATED)

UPDATE - 4 January 2007

FOLLOW-UP ON HIGH PROBABILITY NATURAL GAS SHORT TRADE (see below)

In the original post, below, I relayed to you one of the surest bets in natural gas: to be short natural gas in the 12 to 17 day period after natural gas gaps down on the open two days in a row. As I mentioned, the fundamentals were also working in this trade's favor as we have had one of the warmest months of December ever.

This trade ended last week Thursday, with natural gas declining a whopping 13.6% during the 5 trading days called for to be short. This was one of the largest 5 day down moves in NG during all 2006, (NG was down 18.6% during the 5 days ending April 28, 2006 for the largest 5 day down move in 2006).

Obviously, this was a hugely profitable down move if you were short. It illustrates the power of the tool, the "Market Information Machine", ("MIM") that I used to find this trade. This is because, besides being able to formulate any situation that you can imagine, both technical (as was the case here) or fundamental, you can look out "what happens next" to many multiple slices of time periods after the technical or fundamental event happens to find the super "sweet spot". In this case, the super "sweet spot" happened to be the time period 12 to 17 days after the event. I know of no other machine or device that can help you easily find such super sweet spots after events. In the case of the MIM, it is a just a matter of setting up giant templates that automatically scour all time periods, and you can easily eyeball where to get in and out of a trade in order to maximize profits and keep risk at a minimum.

As in the case of this trade, not all events are followed right away with an extremely high probability of an up move or down move. In many cases, such as this one, there is a DELAYED REACTION. For example, if you looked out three weeks after this event , you would see that NG is only down 60% of the time, not something that you would want to necessarily bet the ranch on, or even consider putting a trade on for that matter. However, with the "Market Information Machine", you can see things more clearly, and with pin point accuracy, such that you don't miss great trades like this one.

If you would like to see me demonstrate how I can up with this trade, please send me an email and I will be glad to show you. However, the MIM is a very sophisticated product that has tons of data and events, and is priced at $5000 per month. Thus, it is only usually affordable to institutions. More reasonably priced, at $350 per month, is a subscription to Markethistory.com, a web site that we publish high probability trading ideas every day and give you a fair amount of the vast toolkit capabilities available with the MIM. Both are bargains! I know of no better tools to help one analyze the markets and take advantage of the historical odds that are many times hidden within the data.

Original idea posted on December 22nd:

It is a lot warmer than usual in most parts of the United States, and this is bearish for natural gas. Moreover, when natural gas gaps down two days in a row, as it did on December 4, then NG goes down 94% of the time within 12 to 17 days after this occurrence.

The average down move is 6%. Yesterday, the start of this trade, we saw natural gas decline 4% right off the bat. If we get a rally in natural gas, back to around $7 on the front month, I'd short some NG futures and cover on the close on Thursday next week, when the trade will be over.

To view a list of the 20 prior times that NG has gapped down two days in a row, click on this link to open a pdf file (78K). You can see that the average down move of 6% is almost double the one time that the trade did not work in 1998.  This is one of the highest probability trades in NG that I know of.

Using Platts Energy Data to Find "Trading Rules"

LIM has long had an excellent relationship with Platts, the world’s premier provider of energy data. Platt’s provides you with energy data history for every energy product, from A to Z. Using LIM’s Market Information Machine, or MIM, you can find knowledge hidden within this sea of data, and extract highly profitable energy trades.

For example, we have found that jet fuel invariably underperforms NYMEX Crude Oil futures over the next week when the heat crack crosses above 7. This has happened 32 times in energy trading history, and this trade worked a whopping 97% of the time!

You’ll find this trade, plus others in our TOP 10 JET FUEL TRADING RULE booklet. Click here to download a copy (240kb).

I point out the heat crack example because these conditions are usually met in January and February. This is almost a sure bet, and if you trade energy, you will not want to miss this trade shaping up to occur in early 2007.  You’ll want to get your MIM and Platt’s data now so that you can take advantage of this “NO BRAINER”.

I’d be happy to further discuss this trade or any aspect of energy trading using Platt’s data. Click on this link to send me an email.