Tuesday, February 28, 2006

XAU down 15% for February

The XAU (Philly gold and silver index) chart looks sorry. For the month of February, spot gold is down about 2%, the mining index is down a hefty 15%! Even today with nice bump in bullion today, the stocks continue their decline. XAU 1-year

Any weakness in the price of spot gold and the mining stocks are in danger of losing their entire gain from December, or another 15% down from here. Danger Will Robinson Danger. Even turbulent news from Iraq and a bump up in oil is not enough to support the mining shares. This tape action looks like major distribution and traders need to be extremely careful as traders are crushed like ants when the elephants move.

Tape action on PDLI is not so good considering the news, however, the overall market decline is a weight. Ten minutes to the close, there is some buying support to bump it up 30 cents more into the close. This is a positive because the cliche is that the smart money moves near closing time.

Google rebounds well off the lows of the day, but risky would be a mild word.

Fear and logic

Google drops like a stone thrown off a bridge after their Chief Financial Officer says growth is slowing. Stock is moving fast Support looks to be at the low of the day 338, resistance 359.

Spot gold higher, but many mining shares flat to down. The mining stocks that recently announced earnings, NEM, PAAS, ABX have all gone down after their earnings. Higher expenses are a common thread.

PDLI stock higher after the earnings, but not much oomph in the step up. The old high at 31.60+ looks like it is offering resistance. I am tempted to cash in some profits with my double position. Logic tells me that the stock is headed higher, so I can weather the short term volatility. Both the call buyers and put buyers are losing today, as the earnings volatility premium evaporates.

Monday, February 27, 2006

PDLI guides higher

PDLI (PDL Biopharma) earnings beat estimates by one cent, and issues higher guidance. Revenues for 2006 projected to be about 10% than estimates. After a volatile up and down day, stock trades higher, over 31 after hours. Wooopaaah! Good news for the longs (including me).
link to Reuters summary

Company estimates 2006 earnings of 38 to 47 cents vs. 37 cent consensus. Even more impressive is the revenue guidance of $405 to $435 million vs. $378 million consensus.

ANF gets the goose

I just mentioned stocks in a base formation sometimes being goosed to give a breakout. ANF (Abercrombie) got an upgrade today and that may be what is happening. I see these kind of breakouts as more risky than those on company news such as earnings. chart

Relatively calm news from the Middle East over the weekend and the civil unrest premium has fizzed out of oil, taking gold and mining shares down with it. The XAU down about 3% with only about a 1% dip in spot gold. NEM (Newmont) on the NYSE volume leaders. The mining stocks often lead, so may be telegraphing further weakness in spot gold. I see it as high risk for both bulls and bears.

GM again touches 20. However, DCX or TM look like better plays at this time. When I bought GM end-of-year tax selling was a big factor. (General Motors, Daimler Chrysler, Toyota) . DCX and TM have less of a problem with the big bugaboos for GM and F, healthcare and pensions.

Friday, February 24, 2006

Buying High

Virtually everyone has heard the cliche "buy low, sell high." What many novices have a difficult time wrapping their minds around is that often times the best time to buy is when a stock is making a new all time high. William O'Neill (Investors Business Daily) did a lot of research in his younger days about the best performing stocks of all time. Time and time again, the chart pattern was a flat base of several months or longer followed by a rocketship bull run.

These days, almost everyone can spot a "cup-n-handle" formation, and there are distortions as people try to jump the trade. Market makers may try to goose a stock to give a false breakout. I am not going to tell anyone that it is easy. However, the flat base followed by a breakout remains one of the most bullish chart formations, even after books being written about it, and seminars given about it. This is unusual, often times when something new is documented it ceases to work because people anticipate it and trade ahead.

I'm keeping my fingers crossed on my PDLI. The stars are lining up for earnings on Monday. There is a chance for a rocketship take-off, a chance for a fizzling dud non-event, or the chance of a spectacular explosion and wreckage. (Like my position in Amazon a few weeks back.)

More PDLI

Trade
Buy/write PDLI. Buy PDLI stock, sell the Mar 30 call (PDL Biopharma)
This adds to my existing position of unhedged PDLI stock. The option premium is sky high with earnings on Monday. I can not bring myself to buy the calls. Shoulda, woulda, coulda bought those calls earlier this week. It is always risky to buy in front of an earnings report, but the tape action is strong and the chart is a textbook base.

News about an foiled attack on a Saudi oil refinery has goosed oil, gold and silver higher. At the close, yesterday, there was a big volume spike in a lot of gold stocks on the sell side. This is unusual. The cliche is that "dumb" money moves at the open or at lunch time and it is often "smart" money that moves at or near the close.

JWN (Nordstrom) down to 38 on earnings report. This is the support area, but buying on bad news at support is a risky strategy. Buying at resistance on good news is preferred. The converse buying on bad news at support is mixed at best.

Thursday, February 23, 2006

Mystified

Incredible volume in the PDLI March 30 calls (PDL Biopharma), with earnings due out Monday, over 2300 contracts traded. Somebody either knows something or is speculating big time. I wish I had bought some of these calls on Tuesday/Wednesday for 75 cents, trading today at 1.25 to 1.30.

ABX (Barrick Gold) down over 5% near its lows of the day. Next support is 26 and it is almost there. Earnings seem okay on the surface, good enough for an after hours bump up, but stock is getting hammered. Somebody may see something in the fine print they don't like. There is little on the wires explaining the tape action.

Apex Silver continues to run, up over 8% today. At this point it looks like a short covering rout. Again, this 30% run seems to be on no news and little movement in spot silver. Sometimes the market can be mystifying.

A waterfall

ABX (Barrick Gold) earnings 29 cents, 4 cents better than estimates. Stock trades higher Thursday after hours, then slumps this morning. Industrial resource stocks such as X (U. S. Steel), POT (Potash) are leaders this morning. PAAS (Pan Amer Silver) earnings out and stock drifts lower. SIL (Apex Silver Mines) continues its unexplained climb, adding another 2% this morning to get over 20. The classic explanation is more buyers than sellers, but little else is out there to explain a 25% climb in less than a week (3-month-chart).

Waterfall decline in Sherwin Williams SHW (3-month-chart) on lawsuits over lead paint. Stocks moving like this are usually high risk, and generally too fast for position traders.

Wednesday, February 22, 2006

Standing still

Don't just stand there, do something! That critical voice is loud when the market is moving and it seems like everyone is making money today. It helps that ABX, BA, BAB, and PDLI are all up today (Barrick Gold, Boeing, British Air, PDL Biopharma). Still the siren calls, telling me that caution is unwarranted, that it is easy money. Heeding the call of the siren, to "do something," usually leads to some bad, even stupid trades. I've been there, done that, have the t-shirt.

Covered call writers will often have this situation: stocks called away at expiration, money to reinvest, and a market that seems to be moving away from them.

PDLI earnings due next Monday. Chart is a picture-perfect base (PDLI 1 yr).

Tomorrow is another day, with a boatload of wonderful opportunities. Cheers.

O Canada (Australia too)

Here is a textbook case of filling the gap (HPQ 5-day) I miss the boat as Hewlett touches support at 32 then bounces.

Interesting article by Gary Dorsh about the Canadian dollar being linked to oil [and gold] at Kitco Commentary (link). One diversified play is the Canada ETF, symbol EWC (2 yr chart). There is also an Australian ETF, which some might see as more a metals and mining play, symbol EWA (2 yr chart).

John Stewart at Schaeffers Research reported 2/21, high volume on NEM call options. Follow the link and scroll down or search for Newmont Mining (link). NEM six-month chart shows a possible head-and-shoulders forming (NEM 6-month).

Tuesday, February 21, 2006

Silver shares strong

Silver shares are surprisingly strong today. SIL (Apex Silver) continues it run, up another 4%+ after an 11% gain on Friday. Other silver stocks are also up even though spot silver up a modest amount today. Who knew? Certainly not me. It is a frustrating day for shorts with the silver stocks up on no real news and a small move in spot silver. This kind of concerted action is a sign of significant money, with the usual suspects being hedge funds and/or mutual funds.

The Yahoo list of silver leaders with the best gains today includes:
CDE, HL, SSRI, PAAS and SIL (Coeur D Alene, Hecla Mining, Silver Strand Resources, Pan American Silver, Apex Silver Mines).

Waiting Game

Weekend news from Nigeria hiccups oil higher, gold and silver follow. Not that much market moving news. The Nikkei had a recovery day, but the Japan ETF, symbol EWJ is flattish. I take a look at JWN (Nordstrom) but I think I can get in lower. DELL looks intriguing as a buy/write right at the strike of 30, but it is not compelling. Gold trades in a narrow range of about $6 today, after $15 to $20 intra-day swings last week.

I can write about stocks with no earnings. Evergreen Solar, ESLR (Key stats), is on the volume leader board, and got a bump higher on news of a contract. It is too richly valued for me to trade, and thin too with under $1 billion in market cap. For companies with no earnings, a person can look at revenues (commonly referred to as the top line). For ESLR, it is trading at a rich 20 times sales. One times sales is a good number, though in many industries, a stock will never get that low.

For now, I do nothing. I wait for better opportunities.

Sunday, February 19, 2006

GLD vs. XLE (gold vs. oil)

Sunday edition
I promised to take another look at GLD vs. XLE (gold vs. the oil EFT), here is a link to a chart (link). At first glance it looks like XLE is leading GLD, but a second look at the converse chart with XLE as primary (2nd link) and it doesn't look that way. One possible scenario that I mentioned is that gold will make a failing top, like oil did recently.

This 3rd link is to BigCharts 10-day chart on the GLD (link). It will show the latest chart, so if you are reading this in the archives, that will not be the one I am commenting on. The 10-day chart shows little to be excited about. The trendline support at 53.5 ($535 spot gold) has been tested three times and held, with a minor rally up at options expiration.

Some gold bugs on other boards seem excited about this three day support rally, I am not. The entire rally might be options expiration related with spot gold being "pinned" to a popular strike price of 550. Some of the arrogance and swagger has returned to the bull's step. I continue to think it is a high risk time to be long gold. I lean towards the short side but that is not without risk either.

Linking the pictures here will slow the loading of this page, and takes a lot more time to post. So follow the links if you want to see the charts, my apologies.

Saturday, February 18, 2006

Home runs vs. singles

Saturday edition
To use a baseball analogy, I am a singles hitter. I hit for average, not home runs. I aim for a 80% or better win rate. That may sound high to some people, however, understand that most of my positions are hedged. If a stock is unchanged or a tad lower, I can still come out ahead. The wins are almost always for limited or small profits and some losses can be big ones. Once in a while the stars line up and I make a good sized profit on a hedged position, like the recently closed out GM (General Motors) that I bought at the end of December 2005.

Three keys are diversification, patience, and option premiums. I diversify so a big loss on one trade can be survived. Patience is required to wait for low risk opportunities. Overtrading has been the demise of many a trader. Some stocks don't have options, other options trade at a small premium so that a seller can't make much money. This third criteria eliminates a lot of stocks from consideration. In some cases, I may take a small unhedged position because the stock looks compelling enough.

On rare occasions I have been known to swing for a home run. As with most home run swings, there is high percentage of failure.

Trades
Sell AMD (option assignment) profit
Sell AMZN (option assignment) overall trade a loss, worst of the year
Sell PIXR (option assignment) profit
PDLI Feb call option expires

On both AMD (Advanced Micro) and PIXR (Pixar) the call buyer made more than I did. An unhedged position would have made more than my hedged position. AMZN (Amazon) was my worst overall trade of the year so far. I bought AMZN before the big dump on its earnings report. I rolled down the calls, but those call premiums did not help that much. The last batch of calls was at the 37.5 strike so it closed well in the money. Some might say the mistake was taking the risk of buying AMZN right before earnings. Yes and no, because right before earnings the option premiums are fat, so there is compensation for the added risk. I waited until after earnings to buy AMD, and the option premiums were down a good bit by then.

PDLI (PDL Biopharma) could be a poster-stock for covered calls. It has traded in a range for several months, with the stock going no where. I have sold three batches of calls on this stock, each at a decent premium. I have pocketed every premium and made a very good return while the stock has drifted lower from my buy point. All the call buyers would have taken a 100% loss if they held to expiration. That is the beauty of covered calls, a stock can be unchanged or even a bit lower, and the option seller can make a good return. That's one way I can get to that 80% win rate.

Friday, February 17, 2006

Apex Silver and Soros?

At the close
Some people on a Yahoo message board (link) are reporting that George Soros has taken a position in Apex Silver, SIL. Whatever the case, the stock is up over 10% today.

Most other mining shares have given back most of their gains. Gold and copper shares have fallen off the industry leader board. Going into a long weekend, this seems counter-intuitive, because there is the chance of a news event spiking gold higher by Tuesday. Financial news that might drive gold lower, usually happens during business hours not over a holiday weekend.

I can count my chickens as they come home to roost at the closing bell. AMZN, AMD, PIXR are called away (Amazon, Advanced Micro Devices, Pixar). The PDLI calls that I sold expire worthless (PDL Biopharma). I'll post more details about these closed trades over the weekend. I also have a small unhedged position in BA (Boeing) and the new purchase BAB (British Air) .

Over analyzing vs. snap decisions

Noonish EST
Gold, silver, oil continue to rally. I am looking at two possible scenarios. The first is a new high on low volume followed by a sharp decline, similar to the recent top in oil. The second is a flag or pennant with the recent highs, $575 gold, $9.90 silver as the top of the formation. The break out or break down from the flag would determine bullish or bearishness. The current time seems like a high risk entry to go long or short the metals or the mining shares. Gold, silver and copper shares topped the Yahoo industry leaders this morning. (link)

A few stocks moving on earnings news: Dell down, Intuit down, Nividia up, Radio Shack down. (DELL, INTU, NVDA, RSH).

Off topic but interesting is a short article in the Aussie Herald Sun on over analyzing vs. snap decisions, the test shows being distracted when making complex decisions such as buying a car resulted in better decisions. (link) .

Certainly I have been known to over analyze a trade. Sometimes it is as simple as checking off the news event, the sentiment, the technicals and fundamentals, all very quickly and pulling the trigger or sitting still. Seems like a lot, and it is, but for students of the market all the above can be given a quick yay or nay in a relatively short period of time.

Thursday, February 16, 2006

DBC - new commodity ETF

Near the close
There is a new commodity ETF, symbol DBC. It uses futures to mirror the performance of the Deutsche Bank Liquid Commodity Index. The index has base weights of 35% crude oil, 20% heating oil, 12.5% aluminum, 10% gold, and 11.25% each in corn and wheat. The index is rebalanced each November.

Earlier today the Dow was unchanged. Unchanged is a good status for option sellers. Time decay works against the option holder.

Looks like my impulse yesterday, to buy speculative puts on mining shares, and my panicky roll out on ABX (Barrick Gold) marked a tradeable bottom. Although I missed the boat, thank goodness I did not compound one mistake with another.

A long weekend coming, so plenty of time for postmortems and Monday morning quarterbacking.

"Pass"

Noon EST
In the news are nice earnings from HPQ (Hewlett Packard), a shakeup at XMSR (XM Satellite Radio), DCX (Daimler/Chrysler) earnings a bit lower, strong housing starts, a recovery in oil, flat to down gold and silver. HPQ looks to be topping after a great 2005 run, but too very risky to be short or long. XMSR looks to be in trouble but there are some buyers stepping up at the 52-week low. Housing stocks got a pop, but are now going back to the line. Housing stocks have been hit hard the last few months as the new housing market cools. Oil stocks are up a tad. Copper mining stocks continue to slide, while gold and silver stocks find some support, even as the metal prices decline slightly in the morning. Now that the prices have firmed up, the stocks are up a bit more.

So these are a few things that I have looked at and said "pass" at least at this time. I will have more "powder" after options expiration and several of my stocks (AMZN, AMD, PIXR) are called away. ABX, I already rolled out the calls, and PDLI, will do after expiration. The disadvantage of rolling out early is paying an extra commission and spread.

Wednesday, February 15, 2006

Temptations and a BAB buy

2:30 pm EST
Trades
Buy ABX Feb 30 call, Sell ABX Apr 27.5 call (Barrick Gold)
Buy/write BAB, buy stock, sell Mar 60 call (British Airways)

Some day I feel smart, in tune with the market--just yesterday, I felt that way. On other days, the opposite. Today is one of those days when I don't feel that smart. Days like today remind me to stay humble. Arrogance and ego have been the demise of many, many a trader. A very few sloppy trades can wreck what it took a long time to build up.

I roll out the ABX (Barrick Gold) calls at what may be near the low of the day for the stock. I find it easy to second guess myself. Some might call this panic. I was also tempted to buy some puts again on PAAS, NEM or AU. The temptation to swing for the home run and buy out-of-the-money puts can be strong. When I get that feeling, usually that means the market is about to move the other way.

As I mentioned in my earlier post, transports are up, oil is down. Rails are the strongest, however, all the railroads I looked at are extended and seem too risky to buy at these levels. Airlines are problematic as most of them don't make any profits and most of their charts do not inspire. BAB (British Air) has been making money. The chart, especially the long term chart on BAB, looks terrific. One downside to this kind of stock is that the options have a wide bid/ask spread. So usually a person has to stay the duration if selling calls.

Witching hour--options expiration

12:48 EST update
Options expire the third Friday of each month, it is sometimes called the witching hour. In the old days, the day often produced volatile trading with wide price swings. These days the volatility often occurs ahead of that time and the day itself is non-event. The option and stock markets are connected, but the market makers are separate. The option dealers have a vested interest in trying to pin stocks to strike prices. For example, Advanced Micro Devices is trading around 39.50. The option dealers may their money to get stocks as close to the strike price of 40 as possible to make as many options expire worthless as possible. I expect less volatility going to Friday as option dealers do what they do.

Oil below $60 a barrel, transports, especially rails are at all time highs. Transportation stocks doing well are often a leading indicator as stuff that gets shipped, later gets sold. I could not pull the trigger on JWN this morning. Gold and silver drifting lower. I am looking at the XLE (oil ETF) chart and it may show a possible pattern for GLD (gold ETF). I will look at it some more, but it may prove to be a useful pair of charts to look at.

I have buy/writes on the following:
ABX (Barrick Gold) out of the money
AMD (Advanced Micro Devices) in the money
AMZN (Amazon) in the money
PDLI (Protein Design Labs) out of the money
PIXR (Pixar) in the money
The ones that are in the money will almost definitely be called away. I will look to sell calls next week on those out of the money. One negative about covered calls extra commissions and spreads, two commissions and two bid/ask spreads in, the same out. In a fast moving market it is not as easy to get in or out.

A few minutes after I write the above, both gold and silver are getting hammered. I don't know if it has anything to do with new Fed Chairman Bernanke comments. Looks like I got scared out of my puts early, will keep looking. Sentiment back to favoring bears.

Tuesday, February 14, 2006

Bad day for bears

Near the close, it is a bad day to be a bear. Aside from oil stocks, and a few special situations, most stocks are up. Glad I exited my gold and silver related put options earlier today. It will not be an easy few days for bulls or bears if they are holding options. I may look for the dust to settle after option expiration this Friday. I've got quite a few more stocks that will most probably be called away.

Basics: a buy/write is buying the stock and selling a call option. It limits upside and provides a small measure of downside protection. A comprehensive study found that buy/writes do as well as buy-and-hold, but with less risk. Again, #1 is survival, and reducing risk is a big part of that.

Another stock I am watching is JWN (Nordstrom's).

Silver, copper stocks are among today's the leading groups. Oil and exploration stocks among the laggards. The daily list at this link at Yahoo Finance is a good source of ideas:
leading and lagging industry groups

Ring the register

noon EST update
Trades:
GM (General Motors) called away. option owner claims 25c div. Decent profit, buy/write December 2005
Sell AU Apr 60 puts to close (AngloGold Ashanti) small profit
Sell PAAS Mar 25 puts to close (Pan American Silver) modest profit

I know I wrote about a $500 price target on gold just yesterday, and here I am going flat. Why? First reason is that the gold price chart is right at its trendline support. Connect the dots on the six month chart of the recent lows and it is right there today. If nothing else, support brings in a few buyers. Second reason the time decay of options, time works against an option owner, nibbling a bit away every day there is no movement. Third reason is that many stocks are pinned to strike prices on options expiration. This again works against an option owner who wants more volatility. Fourth reason is fear and dread. Approximately 80% of all options expire worthless. Survival being #1 on my list, I want to stay out of that 80% shredder.

Monday, February 13, 2006

Where is gold going?

After the close
Where is gold going? Mike Swanson has some thoughts at Kitco link

Me, I think short term support is at $500 for gold, $8 for silver. I don't know where the stop-loss orders are, but I expect at least a run to take out stops below $500 gold. A person has to be nimble in these kind of situations. I may close my puts out before $500, depending on what it looks like then, that number is not written in stone for me.

Gold stocks closed well off their lows and RGLD (Royal Gold showed a gain). It is tempting to buy puts on RGLD, but it is high risk considering the recent decline from 40 to 33.

I have some money in a gold mutual fund and it is underwater. I consider this long term money, different from my short term money. I will own my mistakes when I make them. The traders that never have a loss and buy at the low of the day and sell at the high of the day are a riot.

Overall stock market closes weaker than it looked midday. This is options expiration week, so I look for volatile swings with many stocks "pinned" to strike prices.

Quiet Market, gold and silver stocks keep sliding

Gold and Silver stocks continue their slide. I find it useful to look at the charts for underlying metals as well as the stock charts. It is tempting to cash in small profits on puts on AU and PAAS, but I think more downside is coming.

Bulls remain defiant, daily price swing remain volatile.

The rest of the market looks dull. I continue to watch TM (Toyota) and EWJ (Japan ETF) to go long. TM reported great earnings a few days ago. The troubles at GM (General Motors) and F (Ford) can only help TM. Japan is recovering from a 17 year long bear market. The first bull recovery is usually not the best one, but it has been a sharp one, with a 40% gain in 2005. There is more upside there, but right now is not the best entry.

Earnings season looks to be over.

Sunday, February 12, 2006

First post

This will be a trading diary plus commentary by yours truly.

I've got several positions as of this writing, but do not see a great need to list them all at the moment.

Standard disclaimer: I am not here to give advice, or recommendations. Each person must do their own research and make their own decisions.