1-19-2012

During a recent program, I discussed a market rise that may have been created when “buy stops” were reached by a price rally. A buy stop is an order that one places with their broker or execution program that buys at market, once price trades at a selected price level. For example, the old high in October 2011 in the Nasdaq100 futures NQH12 was 2396.50. A trader who was betting that the Eurozone would cause prices to fall in the equity markets may have sold the Nasdaq futures short making a bet on such a call. However, this trader may have placed an order to get them out of the short position and take the loss, if prices set a new high. They may have placed a buy stop order at 2398.00 for example. If the March futures traded at that price or above, their order would buy at market at whatever the best asking price may be at that particular time. As you can tell, the best asking price may be well above 2398.00 by the time the order reaches the market. The price may “slip” away from the trader and the order may actually be filled at 2399.00 or even higher. This is what is meant by the term price slippage. The chart below illustrates the recent rally in the daily chart.

By the way, prices have had a very nice price run for the past few weeks. A correction in this trend should come at any time.

Buy stops can be a factor when trading intraday charts as well. Look at the 60 minute chart below.

The chart above is the recent price action. Now imagine traders who may have sold the Nasdaq futures short in the area represented by the rectangle. Now where do you imagine they would place a buy stop order to close any short position? Might they be thinking, “if the market sets a new high for the day, I will close out my short position and take the loss?”

Now here is what happens when a series of buy stops are “hit”. At a variety of prices within close proximity, the buy stops are hit and “go to market”. As you can imagine, an order to buy at whatever the best offer may be at the time can cause a swift rise in price. Traders around the globe are almost yelling at their monitors to “get them out” to stop the loss of dollars in their accounts. They made the wrong bet and now they are running for cover. This is what causes the large range in the bar chart.

What happens afterward when the eager buying is over? Once the buy stops have been executed, the market orders are gone. Many times, prices have reached a price level where there are not eager buyers, but thankful sellers. The traders who were long begin saying “Finally! It’s time to take my profits.” These traders then step over themselves selling the market quickly so their profits do not evaporate too quickly. When this happens, you get the price reversal that you see in the above chart.

This dance between the buyers and sellers, who are taking their losses or taking their profits, happens everyday. The idea is to try and make sure it is you who are taking profits more often then the guy who is taking the loss.

1-13-2012

In the past few days, there has been an explosion of sorts in several solar stocks. Why? I have no idea. The point is several investors and large funds must have been attractive to the group, because several stocks have jumped very quickly from very low prices.

The chart of Hanwha SolarOne is just one example. Is this the start of a major new trend? Is this the last chance to buy a solar stock at such low prices? I am not sure of that, but as a speculative play take a look at these stocks over the coming weeks. If the next decline and correction in these stocks is small, in relationship to the large recent gains, instead of going to Vegas and going all in against Phil Ivy, consider a long term play in some of these stocks. Both are just as risky, but one may pay off in a surprise better than the other.

A long in these stocks is extremely risky, but this stock was at $8 in February of 2011. I normally do not look at trades of this nature, but the rally for the past few days has been interesting. There may be something behind the buying spree. I will follow these stocks over time and report on their progress.

1-4-2012

During the last two weeks of the year, there was a hint in the price action of the US equity market that traders would let the bull out of the corral and let it loose. This lead to a 250 point gain in the Dow and a two percent rise in other major stock indexes.  Only time will tell, if this rally will turn into a stampede of investors chasing the market to get back into long positions in stocks and a variety of commodities.

However, the rally of today had a cumulative affect across many asset classes. The strong equity market assisted the crude oil market to move above the $102.00 level. This allows the crude oil market to begin to build a higher base above the $100 mark. This will be an important development to watch later this month. The buying interest was not only focused on the energy complex. Gold, silver, and platinum were higher as well. The buying enthusiasm spread to the grain complex, soft commodities, and most commodities in all sectors. Much of this may have been short covering from the bearish trends of December, but the rally was across the board.

All of this price action helped the US dollar move lower and there was buying interest in a variety of Forex currency pairs. The strongest of trends were found in the Australian and New Zealand dollar. Rather than appear as nothing but corrections in a bear trend, these pairs appear to have established noteworthy bullish trends. Traders may begin to view declines in prices in these pairs as buying opportunities.

The trends of the Euro and British Pound are not so certain. While this one-day rally is impressive in the EURUSD, a one day rally certainly is not sufficient to change a major trend. A higher equity market for the remainder of the week may help the Euro have a larger correction, but the rally has not reached levels of significance to suggest a change in trend has occurred. The rally in the GBPUSD has merely brought prices to the upper price range for the past 6 weeks.

The correction in the US dollar today also gave further evidence that a potential bearish trend is developing in the USDJPY and USDCAD.  Rallies later this week in those pairs may offer shorting opportunities, depending upon upcoming financial news, which may help many of the trends seen today continue later this month.

Many of the short-term charts are overbought or oversold relative to their trends and this may lead to a reversal of this one-day rally. However, the New Year has had a great start and we hope the trends continue.