Gualberto Diaz

I think Thursday may have been the lows we may see this bear market.  Obviously, nothing is 100%, but I’m seeing things that have made me feel a little safe to start getting long at these levels.  And if we break these lows, I really don’t know where support is.  But I think the risk/reward is worth getting long at these levels.

My reasons:

1. One thing we always stress on the desk is to recognize patterns.  On the Level 2, on the chart.  Wherever you can spot something to gain an edge.  I’ve seen plenty of bear and bull traps since I’ve started trading.  If you take a look at the SPY chart over the last 6 months, you will see that the 84 area was established as a level, with 83.50 being the support from October.  On Thursday, when the SPY broke these levels, selling accelerated.  The SPY traded down to 82, then stopped, and reversed hard to the upside.  This is a bear trap.  You have to figure that people getting long after the October 10 lows were setting there stops right beneath those lows.  So when 83.50 was breached, the stops were set off that caused people to get out of their positions.  Aggressive traders were shorting below those lows expecting a vicious downmove.  Instead, there was a downmove to shake out the weak hands,  followed by a very strong upmove.  I’ve seen patterns like this occur so much intraday.  Clear levels are established.  They are then violated.  They then reverse strongly to the other direction.
2. I used to watch Fast Money religiously.  I stopped watching because with the exception of Macke, almost everyone on the show was bullish.  I could understand since they’re owned by GE, and I’m sure they are probably mandated to be more long than short oriented.  But I watched the show on Thursday after the close expecting them to say that the rally was a sign of great strength, and they were all without exception advising to sell the rally.  Another point: Nouriel Roubini, an NYU economist, who saw all this coming down the pipeline in 2006, has been on CNBC only a handful of times during the first 9 months of the year, has been on the network about 3 times since October.
3. Intel lowered its earnings guidance Wednesday night after the close.  Inital claims came in significantly higher than expected Thursday morning.  There hasn’t been one shred of good news coming out.  The market isn’t making new lows on all this news.  This is different than even a month ago, when just a rumor of something would cause a significant sell off.
4. China.  Watch the Chinese stock market for leadership.  In February 2007, the Chinese stock market sold off sharply in one day, causing a worldwide selloff, sending out the warning shot that not all was well in equity markets.  When worldwide markets topped out later in the year, China was the first market to top.  Over the last two weeks, China has showed strength, even when worldwide equity markets have shown weakness.  This is a divergence to take note of.  FXI has been much stronger than the SPY has been over the last 2 weeks.
5. Bill Cara posted 2 charts where he compares this bear market to the 2 most severe bear markets since the Great Depression.  Both the 1973-74 bear and the 1987 bear are very correlated to this bear, and suggest that an end could be close.
6. But even if the US economy goes into a long recession, there will still be opportunity for upside in the equity markets.  On October 13, in his Daily Report, Bill Cara pointed out the returns during the Great Depression that equity traders were able to take advantage of.
   • June 1, 1932 - Sept 7, 1932: 111.6%
   • Feb 27, 1933 - July 19, 1933: 120.6%
   • Oct 19, 1933 - Feb 4, 1934: 37.3%
   • Mar 14, 1935 - Mar 5, 1937: 131.8%
   • Mar 31, 1938 - Nov 14, 1928: 62.1%

We could end up breaking lows this week and starting another downleg.  I’ve been reading many articles lately by Elliot Wave technicians that are indicating we have one more downmove to go.  But for all the reasons I listed above, I feel more comfortable with being long at these levels than being short.

Here are the positions I entered into today:

UYG
UYG March 2009 $20 Calls
GS Jan 2011 $200 Calls
FCX Jan 2010 $60 Calls
BA Jan 2010 $60 Calls
FXI Jan 2010 $40 Calls

I’m waiting for the leaders to emerge for the next bull market before I begin buying aggressively.

Wow, I can’t believe I haven’t written on here in nearly 6 months. The market has been so crazy. Fear is at all time highs. The Vix traded above 80 at one point this week! I’m flat all my short positions. I feel that at this point, there may still be some downside risk, but I think the better risk reward scenarios are to the upside from here.

This past week we held higher lows on all the indexes. So that’s re-assuring. I’m going to dip my toe on the long side on Monday. This will be my first long position in a long time. I’m looking specifically at GS, some emerging market ETF’s, and UYG. I like UYG the best to be honest. As an ETF, I think the downside is very limited with plenty of upside, especially since it’s leveraged.

Like I said, on Monday I will begin to dip my toe into the water, but I’m not going to be very aggressive until i feel confident that the absolute bottom is in. I’m not sure when that will be, but I will be patient. Good luck to all.

Got long of crude this afternoon, not really for a long term buy and hold, but more for a trade.  See if maybe it can bounce back up to 135.  Not sure if we’ll take out the highs, but I’m willing to give it a shot.  I’m long through USO.

The reason why I’m long is because after the bullish inventory numbers, crude kept going higher, forming bullish flags, then going higher again.  In the run up, I saw this pattern a few times, especially into the close.  Bull flags into the close of trading, followed by an overnight gap up.  I’d figure it’s worth the risk.  If this is just a pull back, we could at least test the 130’s.  The amount that I’m risking is minimal, and at this point there is plenty of upside relative to risk.  And if this is just a pullback, it could be a great entry point if we go higher.

With earnings season in full swing, we got some movers today.  Markets are down on AAPL, AXP, and WB earnings this morning.  All disappointing.  This could potentially end the bounce we had going.  We shall see.  I’ve been meaning to post some more, hopefully I can later today.

Keep an eye on the financials, as they will lead the market one way or the other.  With Apple and Google missing, we could see tech start to sell off.  We’ll see what we do from here.

The market has been rallying hard over the last two days.  It seems to be keeping upward momentum even with MSFT and GOOG missing on earnings yesterday.  IBM and HON beat on earnings and are trading higher before the 9:30 open.

There has been a short covering rally in financials as Christopher Cox came out a few days ago and put a short squeeze in the financials.  I’ll write about this more later.

Options expire today, so expect some volatility today.

Market’s down alot this morning.  There was some heavy selling in the financials going into the close yesterday.  Retail sales and PPI come out at 8:30, and business inventories come out at 10.

Stocks that will be in play today will be all the financials, as there is alot of uncertainty surrounding them.  Today should be a crazy day, so play it safe and play some defense.

Really quick, because I’m running late, but as expected, the government has come out with a bailout of Fannie Mae and Freddie Mac.  This has led to a pop in the futures and a possible short term tradeable bottom.  We’ll see how this turns out.

The Times is reporting that the US Treasury is considering a rescue of Fannie Mae and Freddie Mac. Under the terms, the Treasury would inject $15 billion into the companies, greatly diluting shareholder equity. As of Friday’s close, Freddie’s and Fannie’s market caps were $5 billion and $10 billion.

If there is a plan in the works, I expect it to get announced sometime tonight, before the Asian markets open. That is the way they handled the Bear Stearns fiasco in March. Be careful though, there are no sources in the article, so it could just be all rumor

Yesterday was a great day. Sometimes you don’t know when days like that are coming around. Sometimes you can tell. On Thursday night, my roomates asked me to go out drinking, but I declined because I had a feeling something could happen to the market on Friday. I know that when I’m hungover I don’t trade as well, and I didn’t want to sacrifice the day for a few drinks with friends that I see all the time.

Well when I woke up Friday morning, and I saw Fannie and Freddie down another 50% in the pre-market, I knew staying in the night before would pay off. What led me to believe that Friday could be a great trading day? In fact, by Wednesday I was already licking my chops for Friday. Well first of all, there was a breakdown of the SPY below the March lows. That alone has created more volatility as big money battles to send price action one way or the other. Second, was the increased volatility in LEH, FNM, and FRE. You’re talking about 20% plus moves up and down intraday. There were various experts talking about these institutions being insolvent, leading to panic. That’s when I knew there was the possibility of a significant downmove going into the close on Friday.

The Fed stepped in and made comments regarding the GSE’s Friday afternoon that sent the market sharply higher. The increased volatility and that upmove definitely made my day much better going into the close. If the Fed didn’t step in with an announcement, we could have seen the markets close at the lows instead of a reversal. Either way is great for me.

Indymac, the largest independent mortgage provider, failed last night. They specialized in Alt-A, not subprime. This is pretty significant news, as the argument for the Bulls has been, “Everything is rosy except for subprime.” Add to that, the fact that the Fed has denied talking to Fannie or Freddie about opening the discount window, and we have a great Monday morning lineup already. This can add more uncertainty to the financials next week. We’ll see how the market reacts to it, but regardless, I know to get my rest this weekend because I know next week can be as crazy as this week. And as a trader, there’s nothing more that I can ask for.