10 year treasury note

So far this week, the market played the way as I predicted over the weekend. It's down 1% after a flat day on Monday. But tomorrow will be another key day, will the market keep moving lower, or the dip buyers will show up? We have economic data tomorrow to digest, but now the key is 10 year treasury note. Put things in perspective, the market is just 2-3% off its all time high, and bond suddenly rises to a level to drain the liquidity out of the stock market, from FA perspective, we have more down side to go.

1. So if tomorrow is another down day, I need to reduce the short dated puts.
2. If tomorrow is a big rally day, I'll consider to add long dated puts or short ETFs.
3. I will play the shorts and puts for the short term, until my sense of the market direction changes.
4. Dow, S&P500 and Nasdaq all point to a turn in the market, and I expect a 10% correction from the top for the short term, so rally will be used to add shorts, and sharp drops will be used to reduce shorts.
5. I will be careful, even though the global markets showed some weakness recently, Chinese stock market took off again, with bad news poured in: higher than expected inflation; natural disastrous weather in south (flood) and north (drought), and yet the market moved up more than 2% two days in a row. Talking about insanity. I hope U.S. market will not follow China's lead.
6. From the chart, the 10 treasury year note will touch 5.5% before it will take a break, and today's auction of 10 billion bond only got 11% purchases from foreign countries, and mortage companies are selling like this is the last chance to get out.
7. The 10 year note breaks out to a 5 year high today, with big volume. If it holds, it has the potential to go much higher, like 6%, that will further drain liquidity out of the stock market, so I'll watch it closely.
8. Due the high interest rates, I don't see gold and PM go anywhere, I'll wait for lower price on PM stocks in the summer.
9. Today I sold some ITM DIA puts and used about 1/2 of the sales to add some OTM DIA puts, this is speculative play, I want to cash and still have exposure in case the down turn is not over, let's see if it's a correct play.
10. Now I wish I have more cash, for traders with lot of cash, they can afford to short some of the momentum stocks like AAPL, GOOG, AMZN, CROX, and RIMM. As long as you have deep pocket, you know eventually these shorts will play out great for you. Yes, these stock can still run up another 5 to 10%, but will be at least 20-40% lower some time this year. For CROX, AMZN and RIMM, I expect at least a 30% cut.
11. But I stop playing these momentum stocks now since I've been burned in RIMM for buying puts since last November, when it's 120. Now it's 167.
12. So if you're rich, you can afford to make mistakes and still can make money. If you're poor and want to make money, be really careful to not lose money first. And don't bet against just one or two stocks, bet against a basket of overpriced stocks, you will win eventually. But who has the patient and time?

Storm

Market was flat today and it's the calm before the storm, unfortunately, I don't know if it's going up or down.

1. I positioned myself for a sharp drop (2-3%) this week.
2. But this market made me afraid of trading and shorting. To say I'm scared of shorting the market is an understatement.
3. I've been shorting since last December. I switched to PM, uranium from time to time to ride with the market, but in general, I'm on the short side for a good 7 months.
4. Now I may catch the final leg up, but do I have the money to ride it down or just cut the shorts again to reduce loss.
5. I promise, if I get the most of my money back this time, I will be really careful not to add too large a position on one or two ideas, like shorting the general market.
6. And I learned my lessons on buying RIMM puts. From now on, I will never ever short or put momentum stocks like RIMM, CROX, TASR, AAPL, BIDU. Yes, you may catch the exact peak and make a fortune, or you'll lose 90% of your money quickly.
7. Buy stocks using FA make sense, short stocks using FA will make you kill yourself several times over a short period of time.
8. On the contrary, I may need to correct myself and go with momentum stocks. This is for the future planning, for this round, let's focus on existing positions and find them good exits.

Keep it simple

The market rallied back on Friday, but I think the down turn is still intact, if we have a follow through next week. S&P, Dow and Nasdaq have not broken the long term up trend, but they're just not the same as before. Check any one of these charts, you think it's more likely we'll have a down follow through than a rally back to up trend.

1. Even for the long term bulls, some "venting" is good for them. Like I said during the Feb. mini correction, 10% correction is normal, now the S&P was down maybe 2.5% from its all time high. So even this is a correction, we have 8%-13% left to go.
   
2. Even the Feb. correction is about 8-10% for most of the indices, so we're not there.
3. Then, there is a possibility this is just a small dip during the bull run, but if you check the charts since March, this is the first time we have three down days in a row.
   
4. And we continue to have bearish MACD for major US indices; and higher price on lower volume; and higher volume on down days, etc.
   
5. And we enter summer, the slowest time for stock. M&A activities have run its course, now we're near the end of the deals. And of course we have still have a few large deal coming on Monday, which is what bulls hoping for.
6. But just like in 2000, some large deals came at the end of the run, not the beginning of the run.
   
7. Like I mentioned a few week's ago, year 2007, we'll likely to have worse than average weather patterns cross the global, and that will not do well for the stock markets in general.

My action on Friday and Thursday:

1. On Thursday, even I think the chance that we'll have a bounce on Friday was pretty good, I didn't sell most of the shorts and puts and reenter at a better price. I want to keep it simple, once you're moving to catch small bounces, you'll get burned.
   
2. Use recent pattern (rally after each dip), I should sell existing shorts after first big drop; then after 2nd big drop. But this time we have three days in a row. If I sell the short, what if there is another big drop on Friday? Then I can't reenter shorts.
3. But on Thursday, I sold IWM's puts, and on Friday, I bought it back at 15% lower, and that's not even the best price of the day.
4. So the point is, keep overall idea as bearish, and if I have three day down in a row, at least took some positions off the table, and can add back if there is a rally, and if there is another down day, then I still have some positions left.
   
5. I added IWM and QQQQ puts again on Friday, not even at the best entry price since I added them too early. But spread the positions over time will reduce the cost for sure.
6. Also added SDD on Friday, it's the ultra shorts on S&P600 small caps. I think it will perform worse than Dow and S&P500 during the down turn, so switch to small caps short is more rewarding if we indeed have a correction.
   

Next week:

1. It's option expiration week, so we may have some ups and downs, and I hope it will be another down week just like last week.
2. And I will add small puts on rally, and reduce puts on sharp falls. This is the idea, very difficult to time the entry and exit. But as a rule, three down days, you got to sell some puts to protect profit; and three up days, you got to buy some puts to get better entry.
3. Of course, real time trading will be far more different than what I discuss here, and all these are based on the idea that the market will turn lower in the this month, and summer. If this is wrong, then the whole idea is wrong, so still keep it simple an keep watching the market.

Last week is different than Feb drop:

1. It started small, and we have three down days with larger than normal volume.
2. On Feb.27th, we had a big drop and huge volume.
3. I think this time, it's more likely a real turn for the market than Feb.27th. Usually the market top for a slow and long lasting bull market like this one (Oct.2002 to June.2007) should be a slow and small drop first, not a volatile one like in 2000. In that sense, last week is more a sign of topping than Feb.27th.
4. ^VIX certain pick up last week, and if bond continues to drop and push the yield higher, then we'll have a big fundamental factor that's not price in the market.
   
5. The possibility of another great rally now is very small, and possibility of a real correction is higher than 50%, I think.

Market prediction:

1. A down market early next week, I think the selling will resume in force.
2. Depends on the economic news and market reaction, we may have a selloff (2% or more) during next week, and then we'll have another rally after the selloff, towards the end of week.
3. In general OE week will expand the previous trend in a volatile way, so let's see if this hold true or not. Either it will enforce the main trend, which is up since March; or it will enforce the short term trend, which is set last week on the down side. I think it will enforce the latter.
   

Another lesson

Today is a great day for me, since most of my positions are puts and ultra short ETFs. The only thing bad is I sold my June puts one day early, otherwise it's a great profit instead of loss.

1. The lesson I learned today is to stick to your gun at the end.
   
2. When I'm fully in shorts and puts early April, and market went up, I should cut loss. I didn't.
3. And in May, when I finally reduced shorts and added longs (ONXX,EMU,URZ,LVS), I really lost twice. Only EMU and a portion of ONXX were profitable. Others were losers.
   
4. And the QID, DXD and TWM I sold in May are all coming back to life after three down days!
5. This tells me what the bulls can do, they forced you to doubt yourself, to change, and then when it finally comes, I'm in the wrong footing again.
6. I didn't 100% switch to long, actually, I did a decent job to continue to hold a big size of the ultra short ETFs and puts. I gave me credit for that.
7. But because I tried to play two sides of the game, it confuses me and significantly reduce the chance of making money.
8. I'm not out of the wood yet. The market may bounce back hard, maybe tomorrow, maybe next week. The buying of dips is still the game until it's totally broken. We're not there yet.
   
9. So now is still a time to be careful and sell short ETFs and puts if the market down sharply again.
10. And we may have a black Monday coming, depends on worldwide situation, the 5% yield may do more harm to dollar than good. Because all world economies are overheated and rising rate is here to stay for a while, and Feb may need to keep the rate unchanged to save housing market, so this will force US yield to go higher to compete with other countries, this will form a cycle to bring down the US market.
    
11. Monday is usually the day people figure thing out. And June 11th maybe the black Monday of this decade. But again, I called a black Monday a while back in this blog, looks stupid. Just because the market was off doesn't mean the end of the world. Until the liquidity is out of this market, I don't see this to happen.
12. Rising yield is one way to get liquidity out, but it's a slow process.
    
13. Another one to crash the market for good, of course, another terrorist attack, which is still a possibility since the world we're living now is not safer than 5 years ago, thanks for our failed foreign policy.
    
14. But this maybe just another Feb.27th, another buying opportunity for bulls, but I think this time it's real. I expect at least a 10% correction in S&P500. We're just 3% done.
15. But what do I know, all the readers are gone and there is no comments recently, which is good. Now I'm alone.
    
16. I will not sell short ETFs and puts until early next week, to give it chance to run, unless we have a sharp drop at the beginning tomorrow morning, like another triple digit loss on Dow.
17. Now is still the time to buy short ETFs on rallies and sell them on big down days.
18. And hopefully, this time I can get all my gold and PM stocks back at much lower price.

Today's action:

1. Added DIA and QQQQ puts.
2. Sold IWM puts at the end of the market close.
   
3. Added TWM again.

What's next:

1. To be nimble to sell on strength and buy on weakness, I mean short ETFs and puts.
2. To have guts to sit against one or two big rallies.
3. Of course 1 and 2 contradict to each other, and I need to do both of them right to a certain degree to make money in the down market, if finally, we get one.
   

Another down day

It's rare since March we have two down days in a row. And Nasdaq could not hold today, down with the rest of the market. But AAPL and GOOG provided great support to make QQQQ better that it should be. Dow down 1% and Nsadaq 0.9%.

1. Even though I really hope it will have a follow through down day tomorrow, recent lessons forced me to take some actions today.
2. Sold rest of the ONXX today. Now I only have some URZ left, and my exit of EMU yesterday was great decision too.
3. I sold my June puts, they are still worth some money, and if I don't exit and the market comes back tomorrow, I'll regret again.
4. I added SDS today. I bought SDS early this year at 60, sold at 56. Today I added again. Hopefully this time it's not too early and I can catch the fall.
5. I don't feel well after I sold my June puts, because they're all losses, and they can appreciate a great per cent if the market continues to fall. But that idea is based on hope, so I sold them. I still kept the puts I added yesterday.
6. Continue to play the short side, and exit positions quickly if it doesn't work.
   

Poor bear

Today the market closed down in red, but if you monitored the market action, the bulls came back strong, with Nasdaq barely down. This is of course, after Dow, S&P500 and Nasdaq were down 0.9% at one point. Poor bear, can't get anything going.

1. I slowly but surely switch to the short and cash side.
2. Sold half of ONXX and URZ, sold all EMU today. Still like URZ long term, and ONXX can be a big winner if the trail of its drug is successful on other cancers.
3. Added QQQQ puts and IWM puts again today. It's not a big position, want to do it over a certain period to average the price. This, of course, is based on the idea that short term market is at risk of a sharp correction.
4. Curt added some comments on timing the market, it's really hard to do that, anyone who correctly predicts the market tops and bottoms has more luck than skill.
5. Let's see what summer brings to the market, if they are going to take profits, it should happen within the next few weeks.
6. China's bubble vented some steam out. The fact that most of global markets are at their all time highs, and the action in China tells me first sign of the top, most likely a few months away before we see major correction.
7. If we do see a correction now, I think it will be bought by the bulls.
8. It's tough to be a small bear in this big bull market.

What's next

I'm very glad I took a vacation, otherwise I may lose more money for being short again. The market is very strong now, Chinese market crash has no impact, bad news is good news for the market. And many shorts think the market may take a short break, so they add shorts recently, get burned again.

1. I'll change my trading from now on, to correct my mistakes since March.


2. I will trade less, trade small and do more short term trade (like one or two days) until I find my touch again. Many of the puts I added recently was a winner for one or two days. If I sold them, I would not be in such bad position now.


3. Recently I wanted to make gain to cover my losses, and then the market went up again, so I lost more. It's a very bad idea.


4. Let's try single instead of home run. That's my new trading rule no.1.


5. And it's not a shame to lose money in this market, many great traders got burned this time.


6. As long as I learned something from the market, it's not waste of time and money.

So what's next?

1. I have to trade based on some simple idea. So the question is, what's next for the market?
2. If I can answer this right, then I can make some money; if I'm wrong again, I will lose money.
3. And money management can reduce the losing amount, which is critical for me.
4. I think the market is at an unstable point, that it may break out again for one last 'insane' push with shorts covering their positions; or it may break down significantly. I put these two cases at 45% possibility each. And there is small 10% chance it will trade in a small range.
5. Since the market is in such an unstable stage of a late bull run, I think even when it breaks out, it will have sharp drops along the way; even when it breaks down, it will have sharp rallies along the way. So if I trade correctly, then I need to take profit quickly to wait for another better one.
6. That's the main trading plan for me.
7. The two long positions ONXX (cancer drug) and EMU (bought by another uranium company) did OK today, so these two longs are in winning position. I'll keep a tight stop on them to protect the profit.
8. On the puts and shorts, now is time to give them some room, and sell them when there is a break, don't need to make all the money back, just need to get as much as possible.
9. My main positions are cash and shorts, I'll keep it this way for now.