Dragonfly Capital

Macro Week in Review/Preview May 24, 2013

Greg Harmon — Fri, 24 May 2013 23:16:44 +0000

Last week’s review of the macro market indicators suggested, running into the Memorial Day Weekend that the equity markets continued to look strong but with the potential for rotation into the small caps noted the previous week still showing. It looked for Gold to continue the trend lower while Crude Oil was biased higher in its neutral channel. The US Dollar Index was on the verge of a full blown bullish move higher while US Treasuries were biased lower. The Shanghai Composite also looked to be ready to move back higher while Emerging Markets were biased to the downside as they consolidated. Volatility looked to remain a non factor and should be ignored until it breaks above 22 keeping the bias higher for the equity index ETF’s SPY, IWM and QQQ, despite the moves to new highs. Their charts agreed although the SPY was showing the most signs of caution as the IWM and QQQ plow forward.

The week played out with Gold holding its ground while Crude Oil moved up early, only to pull back later in the week. The US Dollar consolidated higher while Treasuries did the same at their recent lows. The Shanghai Composite made a higher high before pulling back while Emerging Markets broke there consolidation lower. Volatility bounced off of the lows again but remained subdued. The Equity Index ETF’s made new all-time and closing highs on the SPY and IWM with multi-year highs on the QQQ before starting a pullback mid-week. What does this mean for the coming week? Lets look at some charts.

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A or B You Decide – It Matters….Maybe

Greg Harmon — Fri, 24 May 2013 16:15:21 +0000

The chart below of the S&P 500 shows the rising trend since the low made November 16, 2012. Since then there have been many instances of top callers each time the RSI has reached the 70 level or the MACD has started to roll flat and then lower. But each time rising trend support (black line) has held and the index has moved higher. Some think this time is different. My friend Ryan Detrick at Schaeffer’s today noted that it may be different because of the break of the rising trend resistance and fall back. This argument chooses path B (the red line). It may be significant and certainly does carry some weight as this trend goes back to February 1, and it is parallel to the support trend. But looked a a little differently, using path A (blue line) the Index touched the top of the wedge and is falling back. A pullback at resistance. Both views

would take comfort in a hold again at the black support line and if the Index gets under the 20 day SMA most on either path would be looking for that to happen. Is it important which line you pick? I say yes. It goes to your psychology, your sentiment. If you have been following the red line this is a big failure and you are likely becoming more bearish. But if you are following the blue line then a good portion of you expected resistance sees this as a healthy pullback for now, no real change sentiment. So which one is right? There is no right answer. Technical Analysis is an art as well as a science and difference between the 2 levels is less that 1.5%. There is no certainty. I would offer that I expect that bearish sentiment would rise because of these two views, but it will rise in a pullback anyway so how do you measure the difference? Try to keep your mind open to these nuances as you chart on your own. It is too bad that charting packages do not have fuzzy lines.

I am not trying to pick on Ryan. He does great work and I respect him a lot. He just happened to write a piece (below) at the right moment. And notice he is not writing from a point of certainty either. Follow him on Stocktwits if you are not.

Why This Current Pullback Could Have Legs

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Premium Earnings 5-24-13

Greg Harmon — Fri, 24 May 2013 15:16:34 +0000

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Lessons From Japan

Greg Harmon — Fri, 24 May 2013 11:56:40 +0000

You have all heard it before in one version or another. “The market can stay irrational longer than you can stay liquid.” “Just because the market is extended does not mean it can’t get more extended.” “A Relative Strength Index at 90 can always go to 90 before reversing.” Good sound advice but did you ever wonder just how long this stuff does go on? Well the Japanese Market ($EWJ) is giving a live example. I first wrote about the possibility of a top on March 20, 2013, a little over 2 months ago in The Japanese Market Move Could be in its Final Stages. A bit premature sure, but the story was unfolding and the technical indicators were there. And hey, I did not tell you to sell then. Then about a month later on April 26, 2013 in

Top 5 Reasons the Japanese Market is Overdone I got a little more aggressive about a top being near. Still not the top though. Thank goodness I did not suggest selling then either. It still had another month to move higher. I reached a peak in boldness just two weeks ago in Who’s Your Daddy! – Kuroda and Abe Are Dominating the Currency Wars on May 10, 2013. I have marked these dates on the $EWJ chart. The 50 day Simple Moving Average (SMA) caught it for Thursday, but the Bearish Crab extension calls for a move lower to at least 10.92, if not to 9.98. And the high volume, and falling RSI and MACD support more downside. Maybe its time to use the bounce last night to take your profits, if you were not stopped out Thursday, and wait for the dust to settle.

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Drew’s Tips – Hollow Red Candle

Greg Harmon — Thu, 23 May 2013 21:49:19 +0000

Drew has been a little rusty so we decided it was time to get him back in the studio.

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A Lead for an Earnings Trade in Salesforce.com

Greg Harmon — Thu, 23 May 2013 19:01:15 +0000

Since it is a long weekend I thought I would put out the daily afternoon idea in time to trade Thursday, so you can take an extra long weekend. In fact you have to trade this before the close to capture the catalyst. Salesforce.com, $CRM, had been moving higher off of a base around 41 until it met the prior high at 47 a few days ago. The pullback began and cascaded with the market pullback Thursday mornings. Opening on the 50/100 day Simple Moving Average (SMA) cross, it has rebounded strongly into the earnings report tonight, closing the opening gap down. The Relative Strength Index (RSI) is in bullish territory but pulling back from a technically overbought condition with a Moving Average Convergence Divergence (MACD) indicator starting to rollover, giving a short term bias to a pullback. Support lower comes at 45, 42 and 40.70 followed by 39 and 35. There is no resistance higher above the top at 47.58. The reaction to the last 6 earnings reports has been a move of about 7.82% on average or $3.60 making for an expected range of 42 to 49.30. The at-the money May weekly Straddles suggest a similar $3.40 move by Expiry Friday with Implied Volatility at 170% well above the June at 45%. Short interest is elevated but not very high at about 9%. Traders were buying the June 35 Put/July 39 Put combo for a 50c credit and the June 43.75/45 Bullish Risk Reversal through out the day, at much cheaper levels earlier.

Trade Idea 1: Buy the June 43.75/45 bullish Risk Reversal for $1.30.

Trade Idea 2: Buy the June 43.75/47.5 bullish Risk Reversal for $0.28.

Trade Idea 3: Buy the May/June 47.5 Call Calendar for $0.68.

Trade Idea 4: Sell the June 40 Puts for a $0.45 credit.

Trade Idea 5: Sell the May/June 40 Put Calendar for a $0.30 credit.

I like #2 standing alone or #3 paired with #5

I took # 3 and #5 together for 35 cents as noted above. Lets see how it goes tomorrow.

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Premium Earnings 5-23-13

Greg Harmon — Thu, 23 May 2013 16:01:11 +0000

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Could Be A Good Spot For a Pullback

Greg Harmon — Thu, 23 May 2013 12:00:06 +0000

About 7 weeks ago I noted that the Percent of stocks trading above their 200 day Simple Moving Average (SMA) was getting up to historical resistance levels in this piece, and suggested tightening stops and protecting. The markets did work through a minor rough patch before moving higher two weeks later. But the percent of stocks above their 200 day SMA did not reset. In fact from a review of the chart below that percentage has broken through the trend line and is at the previous highs from 2009. There are two things that having 94% of stocks above their 200 day SMA tells us. First this is a

very powerful bull market. Second, there is not much room for this to go higher. That does not mean it will go lower, history shows that it can stay at this level for a long time. The high in 2009 lasted for 9 months. But this chart also shows you that when the percentage does move lower it has always been accompanied by a pullback in stock prices. Finviz.com shows that 4694 stocks are above their 200 day SMA but only 2962 are 10% above it. The reset of this statistic to the low 60s then could occur with less that a 10% move. For the time being the trend in stocks remains higher, despite Wednesday’s selloff, and thursday’s premarket action, but the percent of stocks over the 200 day SMA remains elevated and worth watching for a reversal. And this happening right in front of a 3 day weekend? Maybe it is time to extend that to 5 days.

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Don’t Forget the Euro, It Gets Jealous!

Greg Harmon — Wed, 22 May 2013 20:50:16 +0000

The Euro seems to have taken a back seat the last couple of weeks. First the BOJ ~~manipulated~~ managed their currency leading to a soaring stock market, then the shift recently towards whether the Fed will or will not be exiting QE Infinity anytime soon, have taken center stage. Well the poor Euro does not seem to like the lack of attention as it is setting up for a suicide dive technically. A quick look at the weekly price action of the Currency Shares Euro Trust, $FXE, shows 2 bearish scenarios setting up. The first is a Head and Shoulders pattern. A break of the neckline at 126.90 triggers a price

Currency Shares Euro Trust, $FXE

objective of at least 117.25. That level has not been seen since December 2005. Now that should get some attention! It has support for a continued run lower from a falling Relative Strength Index (RSI) and a Moving Average Convergence Divergence indicator (MACD) that is falling. The second scenario comes from the Andrew’s Pitchfork set up. It shows a continuing move towards the Median Line and if that previously mentioned Head and Shoulders triggers, that should attract it lower. So keep an eye on the Euro for a few days.

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Premium Earnings 5-22-13

Greg Harmon — Wed, 22 May 2013 15:49:46 +0000

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