Looking Back Over The Pig's RSI Chart for March 10 through March 28

Click on the above chart to expand it to legibility. Again, for clarity's sake, the chart shows the Relative Strength Index for the Dow 30 components, as well as some ETF's of interest. The first number in each cell is the 2-day RSI. The second number in each cell is the 14-day RSI. The 2-day RSI shows how much a stock is overbought or oversold over a very short term, whereas the 14-day RSI gives a longer-term reading. For short-term trades, I am far more interested in the statistically significant, and tradeable 2-day RSI number.

As I've mentioned before, the colors make the chart Christmas-y. They also offer visual impact, showing the market to be oversold (and greener) or overbought (and redder).

On March 10, 24 out of 30 Dow components were in deep oversold territory. Between March 18 and 25, the Dow had recovered significantly, and many cells had turned pink, if not so much overbought red. As of March 28, the markets had fallen back towards greener pastures.

I continue to hold positions in DXD, QID, and FXP, reflecting an overall negative short-term view on the market. My position in ALB, one of the Zacks Top 10 picks for 2008 is currently my only long position, and is for the longer term.

This week, I am looking for DXD to head towards $62, QID up towards $55, and FXP upwards to $115-120. As they say on Bravo, let's watch what happens.

Is the Bear Sleeping? Or Is He Festering Carrion?

I recently read a Business Week piece on whether or not the market rebound earlier this week was a sucker's rally? Is the bear taking a quick snooze, or is he decomposing carrion?

My read on the market is Growler nodded off a bit after a rampaging start to the year. A bear needs some time to digest some of the ample offerings this season, like the cannibalistic devouring of Bear Stearns.

Here are some excerpts from Business Week:

The stock market is like a sprinter, says Chris Johnson of Johnson Research Group: It runs in one direction and eventually needs a break. "There's only so far a market can go before it gets oversold," Johnson says.

In other words, even a rampaging bear needs a breather now and then. In a bear market rally, despite weeks of losses, a bleak economy, and a raging credit crisis, stocks will bounce back. Temporarily.

To distinguish a bear market rally from a true market bottom, investors often look for extreme levels of pessimism. When investors get extremely pessimistic, they've reached the end of their selling, the theory says, and that's a great time to buy stocks.

...

Johnson says the market bottom is more likely to be a "process" than one single event. He's carefully watching the VIX index, a measure of volatility in the market that is traded on the Chicago Board Options Exchange. The VIX was above 25 on Mar. 25, and, through the worst of the recent crisis, the VIX has traded up to about 35. When this measure of fear hits 40, Johnson says, pessimism might finally have hit extreme, and bullish, levels.

If you look at a recent chart of a bullish market, you'll see that the market occasionally pauses, and pulls back to its 50-day moving average, before continuing along its longer-term trend. The chart below shows the Dow from October 2006 through June 2007--a bull market with a series of small pull-backs, or bull naps, along with a more substantial rest for the bull in March 2007.



The current bear market has had its share of bear naps, as the arrows on the chart below helpfully point out.



Eventually, the bear will one day go to sleep, and fail to wake up. No kids, he's won't be dead, just hibernating.

Chris Johnson in the Business Week piece kinda sorta hedgingly believes that the bear will shuffle off this mortal coil when the VIX hits 40. I get the feeling that he pulled that nice round number out of his posterior, but it can't hurt to keep track of the VIX and look for extremes in sentiment.

Here's a weekly chart of the VIX. Notice that volatility has been quite elevated recently. Also notice we are nowhere near a VIX reading of 40 right now.

FXP

The Pig picked up shares of FXP early in the day at $98.67, and just before the market close at $96.41. Together, my position in FXP is at a cost basis of $97.54.

FXP closed today at $96.98, down $9.79 or 9.17%. Intraday, FXP traded between $95.88 and $103.02. Its RSI(2) at the close was 14.61. If you click to expand the chart below, you'll see why this low, but not extremely low RSI(2) reading has been a successful buy signal in 2008.

Ultra-short ETF's on Another Big Up Day

I couldn't resist posting the stock certificate featuring a sniffing, huffing pig.

Today's big market upswing on news that JPMorganChase quadrupled the value of their offer for Bear Stearns offered me an opportunity to increase my position in DXD at a lower price. It's a good thing I didn't get filled last Thursday at $55.99, as I picked up shares at $54.205, cost-averaging my position in DXD down to $55.60 a share.

If you click on the chart below, you'll see that DXD has been trading within a tightening range throughout 2008. I am operating under the thesis that today's market action is a reaction to positive news within the context of a downward-trending bear market. With that in mind, I am looking for shares of DXD to head back up towards $62.



QID, the ultra-short QQQ ETF dropped 8.25% today, whereas shares of QQQQ gained 3.46%. The shellacking of QID drew my attention, as well as some investment dollars. I established a position at $48.39 per share. The same investing thesis holds for this position as with the DXD position. If QID remains range-bound, I will look eagerly to the $56-57 levels in the near term.

Bought and Sold

Did a wee bit of buying and selling today. Squeezed it in before the long holiday weekend. Maybe I'll actually find time to get a haircut tomorrow, since I won't have the alluring distraction of this swing-y market to keep me put between 9:30 and 4:00.

First off, I closed out my QLD position at $68.11. From a basis of $72.79, that comes to a loss of 6.4%. This was the other half of the QLD position that I mentioned in the previous post. If you consider that I had a 7.9% gain from that sale, it looks like I came out ahead 0.3%, or break-even if you take into account transaction costs.

On the buying side of the ledger, I opened up a position in DXD at $56.99, and not quite added to the position at $55.99. Almost had that order filled as the market approached the close, but I just couldn't get my bargain price.

And I fortified my holdings in ALB, adding shares at $34.15. Averaging in my other shares bought at $37.15, my ALB position currently has a basis of $34.90.

Dow Surges 420 Points on Fed Rate Cut and Earnings

Yes, the above headline appeared on the New York Times website earlier today.

Good day for the long positions, and the Dow rose a nice round number that will linger in memory long after I've shifted over to shorting the market, and back.

Speaking of long positions, since I blogged last, I added to my ultra-long NASDAQ position (QLD) on March 10 at a price of $63.46. March 10 was a very good day to pick up some long positions. March 10 is represented on the chart below by the mostly dark green column.



I closed out that portion of my QLD position today, selling at $68.50, for a gain of 7.9%. I'm still holding the QLD position I mentioned in a previous post with a basis of $65.73, as well as some shares bought at the end of '07 and beginning of '08. While that 7.9% return looks gaudy, my remaining position now has a cost basis of $72.79, so unless the NASDAQ goes on another tear, I'll be glad to sell out the remaining position (hopefully tomorrow) at a small loss.

Also closed out the ultra-long Dow position (DDM) today, selling at $72.855 from a basis of $69.90, for a return of 4.2%.

My chart shows a progression from green to pink/red. It filters out/obscures the wild market moves of the last few days.

I am happy to take these profits from today's upward surge. But the overall trend is still bearish in my view. The annotated chart below offers the pudding for those of you who want more than some words for proof. From my reading of the chart, plus my reading of The Big Picture, the Times, the Economist, etc., I am more comfortable on the short side of this market, and will look to build up those positions tomorrow via QID, DXD, and FXP.

The Wait Is Over

Sell Mortimer, Sell!

Patience paid off as I finally closed out my remaining positions in DXD and FXP. I didn't sell at the deepest troughs of today's action, but I profited nicely, posting an 8.3% gain on the DXD sale (sold for $59.00, from a basis of $54.48) and a 12.7% gain on the FXP sale (sold for $95.55, from a basis of $84.80).


Buy! Buy! Buy!

I did buy at close to the bottom of today's trading, going long on both the Dow and the NASDAQ. Each was extremely oversold at midday. Picked up shares of DDM at $69.90 and QLD at $65.73.

Patience, Grasshopper...

...kept my power dry, twiddled my thumbs, etc. Can't think of any other cliches signifying that I did absolutely nothing but watch the markets today, like a creepy voyeur holed up in an oak tree.

The Dow opened lower, and rebounded a couple of times, but it couldn't quite manage to buck the downward trend.

My RSI(2) chart is still quite green, with 12/30 Dow components in dark green, and 3/30 in light green. That compares with 16/30 and 9/30 respectively on Friday.




Hopefully tomorrow will provide a lucrative opportunity for me to close out my positions in DXD and FXP.

I will not necessarily jump into a long Dow position using DDM.

Why?

It is trickier to trade profitably on the upticks in a down-trending market. If I miss an opportunity to close out a long position in a fleeting uptick, I may not see that level again.

But the market looks like it's moving sideways.

Looking at a daily chart:



Over the last six weeks, we see that the Dow has been trading in a range between roughly 11,750 and 12,750. The market swung back-and-forth in what looked like a triangle pattern. (Not that the triangle pattern shows us anything of any import, but the eye is drawn to such orderly geometric patterns.) Nevertheless, that triangle formation looks to have ended on the 27th, when the Dow broke that 12,750 level.

A weekly chart shows that the broader trend since October has been decidedly bearish:



Right now, I am more comfortable in picking up shares that short the Dow and China, like DDM and FXP, when those markets have fleeting episodes of strength.

Another cliche, the trend is your friend, is apt. Don't fight the tape. (Gah! The cliches are relentless.)

However, I will not shy from going long in the short-term with DDM. But only when the RSI(2) is most encouraging. Until then, I wait quietly...

The Dow Leapt from Red to Green

The Pig took some profits on his short positions on Leap Day. I felt like I jumped the gun for a meager 3% gain on the sale of shares of DXD. Those shares were sold at $57.15, with a cost basis of $55.48 basis. I still hold a position in DXD with a basis of $54.48.

I got caught up in the selling atmosphere (in a good way) and unloaded shares of SDS for $64.00, from a $59.50 basis, for a gain of 7.6%, and made a quick three-day trade of FXP, selling shares for $90.20 at 3:59pm, from a $80.88 basis. That's a nice 11.5% pick-up in short order.

16 out of 30 Dow components are showing up dark green in my chart. From the 27th of February to the 29th, the RSI(2) reading for the Dow swung from one extreme to another, from 93 to 8.

I am excited for the first few trading days in March. If the market continues downward, as the bad news out of Boeing portends, I will look to clear out the remaining DXD holdings, as well as another block of FXP shares. And on the purchasing front, I will look to bolster my holdings in ALB for the long-term, and pick up some DDM for a short-term swing trade.

In spite of my eagerness, patience is the operative word for Monday. Establishing every trade on my wish-list immediately would be hasty and hoggish. After glancing over my collected RSI data, I have noticed that there's often about a three day period where the market lingers in its positive, or negative, as it is right now, sentiment. You can see an example of this in the above chart--the Dow was overbought and was mighty red from the 25th of February through the 27th. Friday was the first day in oversold territory, so we may be in store for at least a few more.