Fibonacci Rule

Today was another one of those last hour reversal day. Just an hour or so before the end of the trading session, the market started to reverse from a deficit of more than 200 points to closed nearly unchanged. What was striking is how and where the market started to turn around. You can call it coincidence, collution, natural behavior, or whatever you like. Take a look at the following charts where I have circled the spot where the market started to reverse. All of them reversed near or at a Fibonacci retracement level. I can see how some of the indices reverse at similar time, but at the same inflection point? If you are not watching Fibonacci retracement levels, you might want to consider it after you have reviewed these charts. As usual, click on the chart to get a larger image. The solid white line is the 0% & 100% Fibonacci level while the dotted lines are intermediate levels.

Hello Down There!

The market appears like it is standing on the edge of a cliff, with a slight gust of wind and it will be headed down. You can feel the volatility is coming back. Lot of stocks are setting itself up to test their October low, with the financial stocks leading the way and the energy and tech follow. So, say hello down there and get ready to dive. Inverse ETF is the way to go if you don't want to short the stocks, DXD, QID, SDS, TWM, SKF, DUG and DTO (ETN).

Just a few words on DUG. If you believe crude prices will continue to drop, then play the DTO. If you believe the oil and oil service companies will go down, then play DUG.

The Disadvantage.

What a rude of awakening today. Oil went below $70 a barrel and the ultra short ETF for Oil & Gas, DUG loss more than 16%. How can that be, one might ask (well, I certainly asked.) After checking out what the holdings are in the DIG, the long ETF for Oil & Gas (inverse of DUG), I discovered the disadvantage on using the DIG and the DUG to play the oil.

First of all, if you think the DIG and DUG is a direct play on oil, you are wrong. If you want to play the oil directly using ETF, then USO is the one to trade. The USO invest in the NYMEX future contracts on the West Texas Intermediate sweet light crude oil. Therefore, if oil prices go down, USO will go down, and vice versa. But, the DIG does not invest in oil directly. Instead, it invest in the stock of oil and gas companies such as XOM, CVX, SLB, COP, etc. And the four stocks that I just listed represent over 60% of the DIG holdings. If the stock price of these oil companies goes up, DIG will go up and DUG will go down. Similarly if the stock prices of the stock holdings in DIG go down, DIG will go down and DUG will go up. As one can see, DIG will go up and down in regardless to the actual price of a barrel of oil. Of course, the oil prices will have influence to the stock prices of the stock holdings in the DIG. But there are time that it will not. Furthermore, the percentage of the price movement also does not correlate between the DIG and the oil prices. One good example of this is what happened to the DIG & DUG today. The energy stocks rallied today, XOM gained more than 11% and CVX gained over 5%. Since XOM and CVX are two of the top weighted stocks in the DIG, these price gains caused the DIG to go up 16% and caused the DUG to lose over 16%. At the same time, the price for a barrel of oil went below $70 a barrel by moving down over $2.00. If you were looking for DUG to move up because the price of oil went down today, you were greatly disappointed.

So beware of the disadvantages if you plan to use DIG or DUG to play the oil. It is not what you think it is.

Why Bother!

With so much fears and volatility in the market, I'm not even going to bother on trading individual stocks. What I know is the market is unwinding and it is going down, what I don't know is how low will it go and how it will get to the bottom (the low could be somewhere in the 2002-2003 low, we won't know until the market get there.) Therefore, by buying the ultra short ETF on SP500, Nasdaq 100 and the Russel 2000, SDS, QID, TWM respectively, I will ride the trend without having to worry about the directional move of any individual stock and avoid the opening gap risk.

In addition, as the global economy is being dragged into a global recession by the credit crisis, demand destruction for oil will bring the price of oil back down to the level where it begun to run toward the speculative $150 per barrel, and that level is in the $65 range. Since the price for a barrel of oil exceeded $120, the daily US consumption has decreased by 1 million barrels a day. With the anticipation of the price for a barrel of oil to go below $80, I will buy the ultra short ETF, DUG.

As the world central banks and the Fed are pumping enormous amount of liquidity into the financial market in an attempt to solve the credit crisis. these moves will cause tremendous inflationary pressure for the future. With the panicky investors seeking safe haven along with the inflationary pressure that will come due to the expansion of liquidity by running the currency printing presses, the price of gold will move upward. To profit from the upward movement of the price of gold, I will buy the gold ETF, GLD.