I like to speculate in assets not correlated to the stock market or really any other market.  Although it seems that all commodities can only go in one direction right now, that's not always the case with gas.  Fortunately, another ETF product has been brought to the market so that us mere mortals can trade unleaded gasoline.  Victoria Bay famous for their oil and natural gas ETFs have rolled out another single commodity ETF that tracks gasoline.

A couple of things to be aware since it appears that this ETF is structured pretty much the same as their previous ETFs.  The ETF is set up to track the change in gasoline futures from day to day.  So if the futures are up 1%, so should the ETF.  Like many ETFs that track something (S&P 500, Dow, Gold, etc), the price of the ETF can nearly relate to the index it's tracking.  For example, the SPY is 1/10 of the S&P 500, GLD is 1/10 the price of gold, etc.  The ETFs from Victoria Bay don't have that sort relation.  So it's not easy to tell from a price standpoint how things tracked on a given day.

The bigger issue, that all futures based ETFs have to deal with, is backwardation and contango.  Gasoline is in a pretty significant contango environment right now.  The front month (March) contract is about 15 cents cheaper than the April delivery.  Since the fund holds futures, eventually they'll have to roll to April at some point.  When you have to pay more for essentially the exact same thing, you've lost money.  This is something any futures trader would have to deal with, but may be foreign to those who would think over time that the ETF would track the spot price with a great degree of accuracy.  If you want to hold this ETF for some time, you may want to let it trade for awhile and get an idea what the tracking error to the spot is going to be.  And if you're not familiar with the terms contango and backwardation, I'll explain briefly, but highly recommend you understand it throughly before investing in futures derived products.

Backwardation is where the price of a futures contract further out is cheaper than the front month or spot price.  An inverted yield curve is a good example of backwardation.  If you're going to your bank for a CD and they're paying you more annually for a 6 month CD than a 12 month CD, this is a case of backwardation.

Contango is the exact opposite and is the case for the gasoline markets now.  It's going to cost you significantly more to own gasoline for 60 days than it will for 30 days.

The news is grim everywhere.  The Shiller Housing Composite is negative for the entire year of 2007.  One headline reads "The Sky Has Fallen".  Mainstream outlets have been using crisis and crash with regularity.  As most contrarians believe, the mainstream media headlines are the last to get on board with the trend which means it may be about to swing in the other direction.  For confirmation of this, a chart is quite interesting.

This is a chart of XHB, the homebuilder ETF.  The downtrend line drawn shows the very deep and dramatic downward spiral that the homebuilders have faced over the last year.  This chart doesn't even show the highs on the XHB, but it is showing the lows hit in January.  What's interesting is the subsequent bounce, followed what looks like a base.  I don't think XHB is ready to launch to any sort of highs in the next couple of months, but as the news in January and February got worse and more widespread, the XHB gained ground.

I have no position in XHB and don't recommend any action.

I haven't put on many trades recently because the range hasn't triggered any open signals.  The MSFT put I sold with a strike of $27.50 looks like it may be breached, but we'll see.  I think the "bad news" of the Yahoo merger is already priced in.  I'm not sure what will happen if a bid is accepted, but that doesn't look too likely anytime soon.  Stranger things have happened though.

12,500 on the Dow provided some stiff resistance yesterday until the bail out was announced.  Then we rallied a bit and closed above 12.5K.  This puts us at the upper portion of the range that has persisted for a couple of months.  This is one of those cases where I can make an equal case for movement in any direction (or no real direction at all).  Hard for one to open speculative positions when I can't get excited about any possible outcome.

Even the VIX isn't real clear.  A chart shows that it's at the bottom of its short term range, but near the top of a long term range.  Tough times.

We're one week away from closing out the month, but I thought I'd share an update now that I have a little bit more time.  The pain of getting information from IB on a weekend really wrecked the rhythm that I had delivering these updates, but I'll try harder to make them so.  If for anyone, I do it for myself to help stay on track.

So here's what we have month to date for February.

And here's how the major indexes have done within that same time period.

It looks like I got a little relief so far after being pummeled the month before (moreso than the markets).  Here's to the remainder of the year outperforming.

Lots of typing over the last couple of weeks (updating help, much coding), so the thought of sitting down to type some more blog entries hasn't been all that appealing.  But double good news on that front.  Now that the RightEdge 1.2 beta is out (good news piece number 1), I can start updating my blog a bit more (good news piece number 2).

Even if you've used previous trials of RightEdge, there is a new license file that will allow you to use it until April 1st, 2008.  You can download the beta here.  If you're not already a member of the site (free, and private), you can sign up here.  I also highly recommend viewing the release notes here.  As always, I welcome comments on the blog, but you'll get the attention of everyone who's involved with RightEdge, not to mention a whole lot of good helpful folks, by using the RightEdge forums.

Now to go ice my wrists ...

I'm not huge in the support and resistance camp, although it seems to have some merit sometimes.  Lately it's apparent that there's been little in the way of significant support or resistance on anything that's not in increments of about 250 on the Dow.  Significant S/R seems to start at 12000, 12250, 12500, 12750 and so on.  In between there, has been our wild rides with 200+ point moves in a day.

What's comical to me, is that depending on which way things swing on any given day is the headline.  Doomed! is what it should read on bad days.  Boomed! on the good days.  If I had the time, I'd like to count the headlines that are negative on down days and positive on up days.  The point in all of this is that the media (just like in political coverage) creates a lot of noise.  If you're a short term or even intermediate term trader, it's far more important to keep your head clear of this noise.  If you look at the dow over the last couple of months, it's been stuck in a 700 point range.  This hardly makes much of a case for either the bulls or the bears to me.

A great entry yesterday by Roger Nusbaum titled "What If You Learn You Can't Handle the Stock Market?"  This brings me back to the last bear.  When I first starting buying stock, it was easy.  You place your trade and your friends and co-workers place their trades and you see which one goes higher.  And I was good, my stocks would go higher than others typically.  And it was because I knew what I was doing and had sound reasoning.  <cough>.  By 2000, I was putting everything I could into the market.  I'm sure you can guess how this story plays out.  Fortunately for me, my fear hit sometime in 2001 when one of my tech heavy mutual funds was only down 50% or so.  I pulled everything and began to really study the market.  This is where trading systems entered my life.  Given my background as a programmer, coding my own trading systems followed very quickly.

But there comes many points during a bear where you ask yourself the above question or begin to doubt that being in the market or being a trader is the right decision.  I don't think it's for everyone.  But if you control risk properly and stick to trading plans, you should come out OK.  But no guarantees.  If you're just now starting to trade or use trading systems, these are tough periods.  I highly recommend backtesting between 98-2003.  This gives you a great sampling of the peak of irrational exuberance and the subsequent pop.  Pay close attention to the drawdown figure.  Ask yourself if you can handle that.  If you can't, perhaps it's time to take a more conservative approach with less reward.

I frequent option messages boards and groups. After folks get basic option strategies under their belts, they typically begin learning how to trade them in their accounts.  Sooner or later (usually sooner), a loss begins to show itself.  Hopefully the trader did their first several trades with one contract and this is nothing more than a learning experience.  However, the inquistivie trader who has heard "adjustment" strategies mentioned in passing all of a sudden becomes very interested now that they're losing money.  If you have not heard of adjustments, it's typically used in the option world and the context is buying or selling additional contracts against a current strategy to morph it into a new strategy.  An example of this, which is common, is converting or adjusting one leg of an iron condor (i.e. a credit spread at this point) into a butterfly by selling another short option at your short strike and buying the "wing".  Even converting a vertical credit spread into an iron condor has been called an adjustment. 

If Yahoo is doing anything right, they're negotiating like big boys.  I haven't had the luxury of negotiating for a major business with my billions in cash lying around, but in small business, there is a lot of negotiating and everyone has their own interests at heart.  Mix in a little tolerance for risk (i.e. what happens to my business or me if the deal falls through, or what happens if I get the deal) and you have yourself some sleepless hours mulling it over.  One thing I've learned in my experience is to never make them an offer that they can't refuse.  In fact, this violates my first rule of negotiating, he who gives the first number loses.  But someone has to give the number, so always start low/high (whatever the case may be).  MSFT had to make an offer to get the ball rolling, but this is case in point for both "rules" that I have.  If you must break one, don't break the other.

 

First, MSFT is losing or likely going to lose if the deal goes through on a higher offer.  Paying a 70% premium for a business that's experiencing little growth just doesn't make sense.  Second, they tried to make a slam dunk offer which someone obviously anticipated would be accepted graciously.  Far more often than not, this only makes the other side feel like they have something more valuable than perceived on the open market.

 

If you're having a garage sale and someone offers you 10 times more than your asking for what appears to be a beat up old lamp, you may reconsider your asking price for other beat up items in your garage sale (or at the very minimum ask them why they're overpaying).  The shares of YHOO have been beat up and the future is looking a bit grim with the pink slips flying over there.  MSFT thought they were going to come in and save the day for the shareholders.  It didn't exactly work out that way.  Now YHOO wants more.  Quite honestly, if MSFT has come this far, I think they need to meet YHOO half way for the next offer.  If $35 is the "magic number" offer them 33.50.  Maybe they'll bite, but if they don't, you can always try again.

 

MSFT would've been far better off asking a slight premium to the previous close on the day.  It would've made headlines and shown YHOO that they're interested.  Plus, this would be the basis for negotiating further.  I'm not a lawyer, negotiator, billionaire, etc, but this just seems like common sense.

Now to change gears for just a moment.  I've been interested in the primaries especially since Super Tuesday after the race got very interesting.  The Democratic race got another interesting plot twist yesterday when Obama finally overtook the lead during yesterday's states (and D.C.) elections.

It's always fun to debate the issues (except abortion, which usually ends up with hurt feelings).  Tax cuts, social programs, pork spending, drug laws, etc are all real fun lunch time debates with friends and colleagues.  I've been trying to determine from the people I see on TV (on the street type interviews) and those that I run into why they support Barack Obama.  I can understand that maybe you feel this way about that issue and this candidate represents those viewpoints, however, from what I can tell, this man stands for nothing concrete.  He talks in vague generalities and just speaks of making things "better" with no real plan to do so.  And don't forget the "change".

The man sounds like a preacher, borderline motivational speaker.  Maybe this country is so down that it just needs a pep talk, someone to tell us it's going to be all right.  I don't know.  It just baffles me that something this ill defined has a shot at becoming the most powerful man in the world.

Maybe I'm just used to the lies and deception of most candidates.  At least have the intention of saying one thing and doing another.

In my tight circle, I don't run into too many Obama supporters.  If you're an Obama supporter, I'd really appreciate hearing why you like this candidate.  Is it the Cinderella story that appeals to you?  Does he make you feel good?  Or are there truly approaches to problems or viewpoints that appeal to you.  Try to be as specific as possible.  I've heard enough vague generalities from the candidate himself.

After the precipitous drop by MSFT following the YHOO acquisition offer, I sold a naked put.  MSFT was around $30 and I sold the $27.50 MAR 08 put.  Obviously, $30 was not the short term bottom for MSFT, but my game plan was not to call a bottom, my strategy is to own some MSFT shares at what I would consider a short term steal.  This is why the theoretical unlimited risk strategy was tried in this case.  While naked short options have theoretically unlimited risk, they really don't.  What's funny is that a short put is typically not allowed in IRA accounts and not allowed in standard accounts for folks who don't have "significant" experience trading options.  Why is this funny?  Because a short put is no different than owning stock from a risk perspective.  What's nice here is that if MSFT shoots up, I keep my premium.  If it goes down, I own stock at $27.50 - premium.

I won't go into the technical and fundamental reasons why I like MSFT in all of this (unless you want me to), but the point is tailoring a strategy to an outlook.  This will also be a fun ride, regardless of the outcome.  If you're keeping score at home, my short put was filled at 0.30 per contract.  Right now, it's quite underwater.  Another good reason to never follow my trades directly.

I came in this morning to the usual barrage of email (and spam).  Nothing unusual, get a cup of coffee, fight through the spam, give people the best help you can.  Then I came across a very different post on the RightEdge forums from a user by the name of DoQ.  DoQ has always been pretty active and we have a high opinion of him over here.  So enough build up and background, DoQ has made a stunning contribution of indicators for RightEdge.  He also went through great lengths, it appears, to document and explain these indicators.  You can find the documentation for these indicators on his site, tradeengineer.com.

A quick summary of what indicators Mr. DoQ has provided.

• Heikin-Ashi
• Median Series
• Hull Moving Average
• VWAP
• Pivot Points

After I get into his indicators, my second question for him will be how he got his charts to look so nice.

DoQ says he will keep us up to date via the RightEdge forums.

UPDATE:

DoQ is going to link directly to the RightEdge web site for his indicators.  They can be found here.

Markets takes the stairs up and the elevator down, they say.  This becomes so clear during a bear.  Yesterday's 360+ point loss was evidence of that.  If you look at a daily chart, you can see where we bottomed in the middle of January after taking the elevator down in the beginning of the month.  Once again, stairs up climbing almost an average of 1% per day through the end of January and then whoosh, down we're flushed again.

There are two reasons why I mention this.  First, if you're a person who likes to buy when things are down, these may be your quick opportunities to snap something up.  Of course, I would recommend caution and small position sizes if you're a bottom picker.  The second and maybe more important reason is the way trading systems work.  You'll discover most of the time that taking a band violation that goes long and flipping it on its head to go short when an upper band is penetrated will usually yield losing results.  I believe this is much of the reason.  A stock may penetrate an upper band, but usually only does so in the heat of a bull market.  After an upper violation, the stock may pull back, but usually continues in an upward trend and your short begins to bleed.

Be careful shorting stocks using band violation systems.

We're focusing hard on the last leg of RightEdge 1.2.  As a result, content for the blog and trading activity will be light.  I have filled new positions for this month and will recap those at the end of the week.

I can toot my horn when things go good, but let's sound the full alarm when things go bad.  It was evident that my picks could not handle last month's volatility.  Sure, they spit up went things went very bad in the first two weeks.  The picks slightly underperformed during the downswing.  I expect this because my beta is higher.  However, beta is a double edged sword.  I would expect the picks to drastically outperform when we swing back to the upside, but that just didn't happen this month.

Here's the wrap for January.