Hello and welcome back to CRI's CTS Spotlight,
02/11/11: One doesn't quite know where to begin when trying to describe this past week's action. Yes the US dollar is trending lower but so too is the anti-dollar - Gold, the Swiss Franc and now the Jap. Yen. Stocks are moving dramatically higher yet so too is the cost of borrowing. Since so many commodity prices have doubled (if not more) over such a short period of time I must believe we are nearing the end of the counter trend rally that began almost exactly two years ago. Enjoy the ride up, but don't count on these high prices sticking around for too much longer. I am personally using the floating of the Copper ETF as my 'topping' target time frame window - which I believe is sometime this spring or early summer.
This week's CTS blog spotlight is on the Swiss Franc. Not only do I think that there is a trade worth mentioning here but I also think this is a great example to learn from.
The trade arises from the double top breakdown recently registered when the market closed below 1.028. Stops on this trade ought to be just above recent resistance at 1.068. The lesson comes from the fact that this isn't the first sell signal the Swiss Franc has given over the past quarter. And while there is plenty of potential profits to be made, this is an excellent example of how trading systems are not 100% accurate and sometimes it is how you approach a trade that can be as important as why.
First off, lets start with the fact that CRI suggested this market had topped out last fall and that CRI's Weekly Commodity Trend Survey had this market trending down in the middle of November. Clearly this was not the case as the market promptly turned around and went right up through the 'M' top formation which triggers our 'stops'. If one had shorted a futures contract on the original breakdown and had been subsequently 'stopped out' on the violent move higher, the loss would have been of some significance (as every point here is $10.00 and the total loss was in excess of 350 points).
This is where options can be very helpful. Unlike the above mentioned scenario, CRI bought July 2011, $1.00 put options on the original break. They cost $2.50 at the time (considering where the weekly gaps are and what the weekly 50% level is [.9645] there was profit to be made) and I was willing to risk that capital on the trade. 1 contract was $250, not much. So when the market moved through the original top (and those futures traders where stopped out with a huge loss) my option went down in value but not more than my original $250. Yes I was still in a losing trade, but my maximum exposure was only $250. This is where buying lots of time helps. Because the option's expiry is July, the premium didn't go down that much (low of $1.30). Now that the market has broken down again, my $1.00 July Put is back appreciating again and is almost back to where I bought it. I may even consider buying one more Monday morning.
So here is an example of a market where I wanted to be short, was unwilling to take the risk of participating in the volatile futures market and had limited capital to work with. I was able to lock in a short position that may not have been timed exactly right, yet regardless of the extreme volatility, was able to hold onto the position until it became profitable.
There is an old adage that says, the market can remain illogical far longer than we can remain solvent.
We may be right but that doesn't mean the market can act irrationally for short periods of time. Through the use of options, one can ride out those periods of irrationality while others are stopped out at huge losses. Something to consider the next time you consider a futures contract purchase.
That's all for this issue of the CTS Spotlight,
Brian Beamish FCSI
the_rational_investor@yahoo.com
http://www.the-rational-investor.com
No comments:
Post a Comment