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Which Way Wednesday – New Watch Levels

Posted on the 04 May 2011 by Phil's Stock World @philstockworld

Keep in mind that it is still ALL about the Dollar – that pathetic measuring stick of slipping US solvency that has dropped 20% since the market bottomed in March of 2009.  That makes this a not very complicated premise – we are simply going to remove the falling dollar’s effect from our technical analysis of the market and see where the dollar-adjusted ranges should put us.  Keep in mind that our number one concern for US equities at this time is that a rising Dollar will adjust them right back to where they should be – as much as 20% down from here.  

Don’t worry, it’s not very likely the Dollar will plow back to 2009 highs unless there is a terror strike or the EU collapses – it seems even a nuclear meltdown in Japan (the World’s 3rd largest currency) doesn’t make the Dollar gain any value so we’re certainly not going to sweat the small stuff, are we?

Unlike Dave Fry (chart here), we do have a position on the Russell as TZA makes an excellent disaster hedge and you can cover a great deal of downside with the June $37/42 bull call spread at $1, covering with something we REALLY want to buy on a sell-off like CHK short June $30 puts at .90 for net .10 on the $5 spread with 4,900% of upside if TZA rises 15%, which roughly corresponds to a 5% drop in the Russell. You don’t need to hedge, it’s a 5:1 payoff on a straight bet, which is pretty good protection but, on the other hand, if you have a virtual portfolio margin account, you can sell the RUT Weekly $825 puts for $1.15 and those expire worthless on Friday if the Russell holds our $835 target and, if not, they should be an even roll to the May $760 puts, so another 10% leeway on that one.  

Another fun way to raise cash in this sort of market is shorting a vertical.  Usually we say you have to REALLY want to own something at the net price but what if you PROBABLY want to own it but want an out?   You can take the GOOG June $480/490 bull put spread which has a $1 credit and $9 of downside risk.  If you would PROBABLY like to buy GOOG under $500 but want to limit your downside risk just in case they totally tank – then this is a nice way to dip your toe in the water.  Of  course, we love GOOG and would be very happy to buy them for $450 in January and we can get paid $16.50 for selling the Jan $450 puts and that’s enough money to buy $8,000 worth of Russell protection and the worst thing that can happen is we get assigned 100 shares of GOOG at $450 (15% off).  

We have, of course, many of these kinds of hedges so we have no fear at all of a market downturn.  In fact, we’ll be a little disappointed if we don’t get one…  

Now, back to our levels:

  • S&P bottomed out at 800 per our 5% rule (we ignore spikes down and concentrate on consolidations) which makes the 50% retrace 1,200 – adding 20% to that puts us up to 1,440 with a significant mid-point at 1,296 (10% below) which is right on the other side of our 100% line off the spike low at 1,333 so a very significant point there! 1,368 would be the dollar-adjusted 45% line below the adjusted mid-point and we’re failing that.  
  • Dow bottomed out at 8,000 so we just add zeros to the S&P and look for 13,330 and 14,440 which means the Dow is underperforming significantly at 12,800, just 45% above the 20%-adjusted low of 8,800 and not even threatening a 50% bounce off the lows.  
  • Nasdaq 1,500 was our base consolidation and that means 2,700 is our adjusted 50% bounce level.  They cleared that and from there our 5, 10 and 20% lines are 2,835, 2,970 and 3,240 and it turns out that the Nas has been topping out at 2,840.  
  • NYSE 5,000 was solid support and that makes 7,500 the natural 50% line with 9,000 the adjusted line and, like the Dow, we aren’t even there yet.  In fact, the 45% line is 8,550 – just about where, like the Dow, the NYSE was rejected.
  • Russell has been our star, coming off the bottom at 450 so 50% over there is 675 and adjusting that up 20% gives us 810 so, this one is a winner with the 5, 10 and 20% lines at 850, 891 and 972.

So now we know where we’re going to be impressed but that’s at Dollar 72 (down from 89.62) and we’d have to adjust the numbers constantly to get them right every day but at least we have a picture of where our indexes are really performing, adjusted for the currency they are measured in (as we’ve seen how horribly unfavorably they are performing against commodities).

Which Way Wednesday – New Watch Levels

Even as I write this, the dollar is being destroyed in pre-market trading – all the way down from 73.5 at 10pm to 72.93 this morning. This is taking our indexes and commodities out of the red so we can have a nice, pretty open for all the retail investors to gawk at. This morning on CNBC, they were discussing how the Dow was flat yesterday and it’s amazing how nothing seems to bother it. The actual fact is that the Dow fell 100 points from 11:45 to 2:55 but then was jammed back up 50 points into the close to make that "flat" day.  

Keep in mind that ALL we are getting from devaluing US currency by 0.6% in a few hours is to flatten out the market open – THIS IS NOT A GOOD SIGN.  It’s like when you have a flat tire on your bike and you pump it up for 60 seconds and nothing happens – CLEARLY THERE IS A HOLE!  This goes back to my old swimming pool example and they have used up the full force of the Fed hose and still the pool is draining and so they added the weak Dollar hose to prop up the markets and still the pool is draining.  Reminds me of the story of the crashing plane – these values are STILL TOO HEAVY:

Only lightening the value of the Dollar is holding the markets up at these levels so the question is – what’s a Dollar really worth? I mentioned in yesterday’s post, that you may wish to argue that your home did not decline 78% in value to the price of silver in the past 36 months – especially to the guy who is offering to give you silver for your home but, if you accept dollars for it – there’s no difference, is there? In Monday’s post I charted the indexes above against silver and US equities are, across the board, down 50% in 12 months against the price of silver.  

THAT IS REALITY FOLKS – these day to day fluctuations are nonsense and it’s going to be up to us to figure out in the next two days what a Dollar is really worth and, from that, hopefully we can place a fair value on the equity markets. 

Meanwhile, it has never been a truer expression – Don’t take any wooden nickels!  

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