Shorting the Long Term US Treasury (TLT)

Hey Folks,

I've been watching TLT (long term US treasury)and TBT (double short long term treasury) for awhile. I bought a couple hundred shares of TBT today for a couple reasons.

1) The 200, 50 and 20 day averages are all now sloping downward signifying a strong case for a bear market in this asset class.

2) TLT has bounced for a few days and is coming up against the 20 day average, which has rebuffed it twice since the averages bgan their unified downward slope. I think there are good odds it will continue to do that for the time being.

3) If I'm wrong, my stop loss is less than 1% away on TLT (94.80) which would be 2% loss on TBT (or appx 1/4% to my account). On the reward side TLT could easily drop 5% from here, which allows me a 5 to 1 reqard to risk ratio. A lovely set up.

I will add to the position if TLT forms a swing day high, which it could be setting up for. Notice how it went higher today than it has in it's current up swing. If it were to close right now, the low would be 93.48. If it closed lower than that in the next couple days without breaking today's high, it tells me that demand is drying up, and supply is increasing. A good time to short, with an easy stop above the 20 day average.

Here's the chart.



Shorting the above (TLT) buying TBT (double short TLT)
Fubsy

Gold...the King

I love that most of the people I speak to who are involved in the investment world think Gold is too expensive. That tells me there is a ways to go before we have our first intermediate top of this pulse upward. Looking at the chart below, you can see that gold has repeated the same cycle four times in its almost ten year old secular bull market. A break above it's previous high, followed by an appx 15% move upward, followed by a brief 4 to 8 week consolidation period, followed by another equal pulse upward (appx 15%) before having a more significant correction, only to repeat all over again. With this pattern in mind, I'm guessing we have a few months left before gold begins it's significant consolidation phase, which would be the end of the intermediate rally, but not the end of the bull. As I've said before, secular bulls end one way...with the public becoming euphoric, and thus, irrational about the prospects of riches to be had by the asset in question. This drives the price to ridiculous levels, and convinces the masses that it will never again go down.

How many of you own gold? How many of you have dumped everything you own to buy gold? I bet no one is nodding yes at this point. My guess is that when your friends and family are all starting businesses buying jewelry, and there are multi-level marketing positions open for you to join businesses to do just that, the top will be near, and you should be selling everything you own that is gold to buy land. That is at least a oouple of these rinse repeat cycles away in my opinion.

Anyway, here is the chart.



I continue to add to positons in GLD, SLV and GDX. Do not do this because I am. Speak to a financial professional if you are considering investing in gold, and speak to them about your goals, and risk tolerance.

I reserve the right to be wrong 50% of the time. Prioritizing risk management makes that level of accuracy profitable.

Fubsy

Dollar Breaking Support?

It looks like the dollar is breaking down below its previous support level of 75.89. This breakdown indicates continued decreasing demand and increasing supply, and lower prices ahead. If this occurs, commodities prices will continue their upward trajectory. This would benefit gold, oil and agriculture. This sets up a relatively low risk trade. With the dollar closing below 75.89 (currently 75.82) I will buy UCD (Ultra commodity ETF) with a stop to trigger if the dollar reverses course and closes back above 76.00.

Trading Ideas

This chart is a thing of beauty. A break out to new highs after 18 months of consolidation. Fortunately, as I turn on CNBS, and listen to the analysts marching on to the screen, I hear them mostly calling for Gold to be frothy, and due for a pullback. "I would buy, but only at lower levels" is a common mantra. Well, from what I see, gold has a ton of support beneath its current price, and fundamentally speaking, it looks like the Fed wants to print dollars until we are buried in them. Also, looking at gold's cyclical nature, it looks like we are just two weeks out of a weekly cycle low, and have approximately three months or more until gold is due to reach its half cycle high. So, my guess is that they may be waiting a while for those lower prices to occur. For me, the risk/reward ratio is favorable. The one caveat is if the dollar should turn around and sustain some strength. For my money, I don't expect that until we test the March 08 lows a good 5 percent down from here. By that time, gold will be much higher than it is today. I am holding my positions in GLD, GDX, and SLV.

GDX remains in an uptrend. One of the most difficult things to do as a trader is nothing. When a trend is clearly visible, that is the thing to do. Just sit still and take the ride. My only moves will be to continue to add to positions at swing reversals out of corrections.

The bonds are beginning to change their tune. Investors have been buying corporate bonds and US Treasuries consistently for six months. (In the case of Treasuries the investor has been the Federal Reserve who is running out of their self-alotted 1.2 trillion dollar booty. I suspect they will simply turn on the printing presses again if interest rates continue to rise without the support of the Fed's buying spree.) Lately, there has been increasing supply and decreasing demand. It looks like there is a decent amount of supply of LQD waiting to be sold at the 105 to 107 level. And TLT faded around 100. We are now seeing a pattern developing of lower highs and lower lows. Watching LQD and TLT, and will sell short with any strength that reverses below previous highs.

It is interesting that the highest risk bonds, Junk Bonds (JNK), and High Yield Bonds (HYG, not shown) have continued to show strong demand. In fact they are currently selling at levels not seen since the top of the market in late 2007. Apparently the appetite for risk is back. Could it be some of the 2.2 trillion dollars the Fed has printed over the past year and change has found its way to the banks? And that they are taking this money for which they are currently paying how much interest...Oh yeah, Zero! and rolling the dice with high yield intstruments like Junk Bonds? Go figure. The more things change, the more they stay the same. Another head scratcher. Sorry people, this really can't end well.

And here, finally we have the small cap index. A group of 2000 of the most risky, and also most promising companies in America. Notice how they have returned appx 85% since March. As I wrote last week, this index is enjoying a vertical rise, and is heading into massive overhead resistance. I will short this on a swing reversal with a stop above 65.00. I consider this to be a high risk trade as I'm basically betting against the power of the federal reserve to prop up asset prices. Why? Well, I know that one day commercial traders who are taking the long side of the market will eventually reverse course, go short, and trap unsuspecting retail investors who will remain long far after the top has passed. It is the game of greater fools. I suspect that the moment is coming some time between now and the New Year, and I'm willing to lose small amounts on a few poorly timed bets in order to catch the top when it finally comes so I can ride the downtrend for some meaningful gains.

Thanks for reading!

Fubsy

Story of the Day...Gold Makes New Highs...or not?

Having accumulated positions in GLD, GDX, and SLV for the past few months, I'm pleased that gold broke out today to all time highs relative to the dollar.

The question on many people's minds now is, "What next"? My view is that there are enough skeptics of gold to keep it rising for some time to come. As I stated in Sunday's post, Trading Ideas For the Week http://wallstreetwatchdawg.blogspot.com/2009/10/trading-ideas-for-week.html, I believe that gold is in a secular bull market dating back to 2001, and that secular bulls end in one way, and one way only: With the public becoming irrationally exuberant about the possibilities of wealth generation through the asset in question. In other words, the common thought at the end of this gold bull will be that gold will never go down again. "This time is different" will be the theme of the day. Cab drivers will be buying and selling gold, as will soccer moms, school teachers, grocery clerks, doctors and lawyers. Unfortunately for them, it never is different, and the public's mass immigration into gold, and the popular delusions that accompany it, will be the sign that it is time to look for an exit. Until then I will grab the bull by the horns and ride, adding to positions on swing reverals upwards as gold bounces out of it's cyclical bottoms.

I added to positions today as Gold not only broke through long term resistance, but is also just one week removed from a weekly cycle low. Note that gold has had a consistent rhythm in its weekly cycle of appx 21 to 26 weeks between lows. Thus, I see plenty of support for a sustained move higher. My target for this leg of the advance, between now and next spring, is approximately 1340.

Here's the real chart of gold's current value in inflation adjusted terms.

http://www.ritholtz.com/blog/wp-content/uploads/2009/10/gold-REAL-dollars.gif

Looks bullish to me.

Fubsy

Trading Ideas for the Week

Here are a few compelling charts.

This chart of investment grade bonds suggests a recent change in the supply/demand balance for corporate paper. The steady rise of LQD over the past six months reflected an increasing risk appetite by bond investors. There were virtually no meaningful ticks to the downside over this period. The last two days have seen accelerated selling with increased volume suggesting that large positions are being liquidated, and perhaps the appetite for risk is in the process of decreasing.

Although this may lead to a change in the intermediate, or even long-term trend, I am especially risk averse trying to time shifts in market direction, as it often takes many attempts before a true top (or bottom) materializes. So, I will risk less than 1/4% of my portfolio with this position.

I will short LQD on it's next rally with a swing day reversal with a stop 1% above the high of the move. The number of shares will be determined by the distance between the entry price and the stop price.
Maximum risk: 170.00.

I will add to the position with a series of lower highs and lower lows.

As is stated in the chart, the Russell 2000 has gained appx 85% since the March bottom. My guess is the easy money has been made on the long side. The risk is shifting to the bulls. Anyone holding a position from a transaction occurring between Jan 06 and October 08 represents an eager seller, creating resistance at current levels. I'm not taking a position until one of two things happen: 1) The market fins a bottom, reverses upward, makes a lower high and turns back down breaking through the recent low, which would create a low risk entry, or 2) it rises toward the 62.00 level at which point I will short with any swing day reversal (a close below the low price of day the that the market makes its high for this move) with a stop 1% above the high price of the move.

The utilities have been rebuffed at the 30.00 level repeatedly. This implies a pool of sellers at this level. I'm initiating a small short position (100 shares) with a stop at 30.10.

Maximum risk: 160.00

Again, when I play a trend reversal I always start small as the area of least resistance is in the direction of the current trend. On the other hand, if the trend reverses, the greatest gains occur from being in the move from the beginning. My belief is that a lot of risk has been taken out of the short trade from the move made since March. So, I'm using tactics to get into short postions, and will continue to do this with tight stops until the market turns. I also believe that when the trend shifts downward there will be opportunities to add to the positions while decreasing risk.

There is one asset class that remains in a secular bull market: Gold. Looking at the chart dating back to 2001 it is obvious that the primary trend for gold is up. Gold has been consolidating between 660 and 1000 over the past 18 months. It has traded above the 850 range for most of this consolidation period, which suggests continued buying interest, and not a reversal in it's trend.

850 was the high in 1980. Interestingly, many people believe that gold is expensive given that it's trading near its all time high around 1000 bucks. I disagree. When adjusted for inflation, the high in 1980 would have been closer to 2350. Keep in mind that in 1980 the average new car sold for appx 6000. We are currently at less than half that valuation. I think gold has a long way to go. I have been accumulating small poositions between 850 and 950. I'm also accumulating Silver (SLV) and Gold Miners (GDX).

If I'm correct, and gold is in a secular bull market, I only need to ask myself one question:

How do secular bull markets end? Looking at any previous secular bull dating to the beginning of markets: real estate, tech stocks, industrials, railroads, tulips etc...one will notice that the bull ends when the general public believes that this time is different, and the asset in question will never go down. So, I will be a buyer of precious metals and miners until the time comes that I over hear grocery clerks, cab drivers, and moms at the park talking about buying or better yet, beginning their new venture as gold dealers. My guess is that the weighting of gold in the average portfolio at that time will exceed 25% and many people will have portfolios made up exclusively of gold. That's when I will watch for signs of the uptrend breaking.

Fubsy