It's Logical

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.

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.