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August 21, 2012 / redman59

Laying Off the Gas

While it is hard to contain the exuberance of the market and the continuous run, I believe it is time to start laying off the gas here by booking some gains and letting things settle.  This morning I took off positions in DE and UNP.  DE I added to on an earnings drop which I was long call calendar spreads and then added calls on the drop.  I ended up returning 32.65% on risk.  UNP consisted of put credit spreads in which I returned 22.11% on risk.  Nothing huge to brag about here but these were the long positions I had on and now I decided to take off.

Looking at 3 charts in particular has caused me to book these gains and now lay off and look for other opportunities.

Chart #1

SPX (left side) you can see that we are near the top of a channel.  If we bust through the top side I see that being more bearish than bullish as the slope of the channel is high and I believe that a break through would be a sign of too much enthusiasm.  Also looking at the McClellan Oscillator you can see that we are at 170 and I like to watch the 200 level for signs of being near a top before a pullback.   The blue highlighted regions on the chart mark other times where the McClellan Oscillator hit over 200

Chart #2

/DX (Dollar Index) is getting hit today being down over -0.75%, but zooming out you can see that it is at the bottom of the base and a prior resistance level which could now be a support level.  It is also testing the up trending 100ema, which I like to use as a long term reference point for long entries on instruments that previously showed momentum.

Chart #3

/ZB (30yr Bonds) much like the /DX chart.  It is retesting its prior breakout/resistance point which could now be a support level.

Overall this is healthy for the market as we are seeing evidence of an outflow of money from the bond market and creates the argument for why we are seeing the market run that we have seen.  Its nice to see sector rotation like we have inside the market and even better to see the outflow we have seen in the bond market to the stock market.  But looking at the 3 points highlighted above of the chart structure (of the SPX, /DX, /ZB), I believe they all compliment each other as showing that it is time to slow down the adding to long equities trade and raise your stops or cash out (depending on your time frame).

11 Comments

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  1. Carlo / Aug 21 2012 11:20 am

    When you start seeing sector rotation like noted above, are you looking for long positions in the Bonds and US dollar(via:options, etfs, futures)? Or just staying in cash until the equity market has its pullback/consolidation?

    • redman59 / Aug 21 2012 11:29 am

      I’ll just stay in cash here and look for setups on the equity side. I’m looking to go long bonds or the dollar and see this as more of a bounce in those 2 while the SPX pulls back. Still believe in the bull case here but just want that pullback now and not get caught up in the hysteria if we do see selling as I will find it to more healthy than anything else.

  2. Carlo / Aug 22 2012 1:33 pm

    Did you have to tweak any settings on your McClellan Oscillator besides the -200 +200? Mine was not showing the 160+ level yours had?

    Thanks

    • redman59 / Aug 22 2012 2:25 pm

      No I only had to change the levels to +200 -200, the 169.97 comes from what the McClellan Osc was reading at the time, a big difference from where it ended up at the end of the day at 49.88.

      • Carlo / Aug 22 2012 2:27 pm

        If your time permits at market close can you give me the reading for the oscillator on SPX?

      • redman59 / Aug 22 2012 2:35 pm

        No problem, it may be a little after the close as that is around the same time I get ready for work. So I’ll get it to you at some point.

        Also the McClellan Osc doesn’t measure against a specific security. It measures against advance and decline issues to the specific exchange (NYSE, NASDAQ, AMEX). I use the NYSE when I look at the McClellan…but in any way I’ll post a reply here after market close.

      • Carlo / Aug 22 2012 2:40 pm

        Thanks. I am familiar with tho McClellan however I use it mostly on stockcharts.com. I wanted to add it to my , thinkorswim platform.

      • redman59 / Aug 22 2012 2:43 pm

        Good deal, yeah its a simple add just by going to Add Studies and it defaults to the NYSE.

      • redman59 / Aug 22 2012 4:18 pm

        Hey Carlo, the McClellan ended up showing 0.0907 at the end of day, this is healthy digestion in my opinion.

  3. Carlo / Aug 22 2012 4:22 pm

    Mine ended up showing .0896 so i guess we are close enough. Pretty large swing in the past few days.

    • redman59 / Aug 22 2012 8:06 pm

      Good deal, yes I would say that is close. It has been a large swing but the does well for a continuation of stocks in my opinion.

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