Birch Creek Trading

A new change of address - again!

2011-02-15T12:27:00.000+08:00

Move once, shame on me, move a second time....Well after a relatively easy trip across this great land, it seems I'm moving once again.

This time, it's the blog - we are moving across to the SuperBlog, MacroBusiness, joining a diverse group of bloggers, to talk about trading, as well as market and company analysis.

In collaboration with my business partner at Empire Investing, we will also be posting on value investing through Australian equities, including individual company analysis, valuations and other topics, all with a macro/skeptical/risk is not volatility bent.

I'll be posting exclusively there, so this short-lived blog is going to sleep.

It was fun - but the fun is just beginning at MacroBusiness!

Here's a little info on what to expect:

MacroBusiness was formed by four bloggers who reckon the gap between the Australian business media and reality has widened to a gulf.

That this is possible without the heavy-hand of a dictator is testament to the power of vested interests, monopolies, weak government, closed ideologies and a perennial culture of populism.

In effect, it means our leadership class can make unaccountable economic and business blunders, or, they are measured against entirely inappropriate yardsticks.

At MacroBusiness we use reason, history and ideas to bring you a bigger picture of the choices we face for our economy, businesses and investments.

We are the hedge fund of Australian business media.

Back in Business

2011-02-09T12:57:00.000+08:00

Well I'm back here in Queensland after 4645km trip across the country. No problems or dramas except a few water crossings as previously mentioned.

Ready to get back to business! At this stage only 1 trade has gone awry whilst away (I had pared back most of my positions before leaving, given we had almost no internet reception for most of the trip).

I'll have end of week analysis posted by Friday night or Saturday morning and a trading update thereafter, including my first month's performance.

It's also the start of the earnings season with a few favourites (COH e.g) having already reported, as has CBA which has implications for future trades. I'll be under the hammer working in my investment company doing new valuations on approx. 80 companies (and the ASX50), so it will be a busy few weeks, amongst unpacking and getting a handle on our new environs!

Almost there!

2011-02-06T19:13:00.000+08:00

Our trek across this huge country of ours (you don't realise until you ceaselessly drive across it) continues - we are currently at Cobar, NSW and heading NE for our new (to be announced) home in Queensland.

Only one minor problem - a pretty badly flooded road crossing just outside Wilcannia. Fine for cars/4WD's but not this little black duck and his BMW motorcycle, so I waited for the waters to recede a bit.

Unfortunately the rest of the country's bad luck with the weather has continued, with Anthony, Yasi and now the new fires developing in the Perth suburbs. Let's hope this run of very bad luck does not continue into the rest of 2011.
Maybe the climate change guys were right after all?

Crossroads

2011-01-29T11:58:00.002+08:00

A little introspective today from your trading blogger. I'm putting on my "philosophers" hat and taking off my trading/investors hat to talk about something that I have thought about - both publicly and privately, for many years.

My thoughts on Australia's future have evolved over time, starting from a very nationalistic bent as a youngster, to acquiring an understanding of our economic structure and place in the world and then to discover first hand via experience and travel what futures (plural) may actually lie ahead.

My progression reminds me of Francois Guizot's oft-stolen quote:

"Not to be a republican at twenty is proof of want at heart; to be one at thirty is proof of want of head."

I contend that Australia has three future paths to choose from:

Continue with the current system, evolving into a quasi-Southern European economic model
Adopt an Asian-based economic growth/highly capitalistic (i.e privatised) model
Adopt a Scandinavian (i.e Norwegian) socialist style economic model

Let's get something out of the way first - I'm an idealist - intellectually and morally, I am a libertarian. I think AND believe it is the only moral system that society can adopt and sustain for freedom, prosperity and peace. For a quick primer (if you have 10 minutes to spare), please watch the "The Philosophy of Liberty".

But, I'm also a realist. In the real world, a libertarian "State" (a contradiction in terms) would not work, neither would an anarcho-capitalist variation. It either devolves into crony capitalism - i.e exactly what the USA has become, turns into a bureaucratic charade - ala the European Union, is defeated by other nations through economic or military power, or most likely - the people don't want the responsibility and would reject most of its moral notions and requirements for living in a free society.

So what does work and why?

When you examine the world and note different countries approaches, two regions stand out because of their success: Scandinavia and Asia. The former (including Denmark, Sweden, Norway and Finland) have extremely high standards of living, 100% literacy rates, very democratic government, high GDP per capita and prosperity, but low GDP growth and mild to non-existent inflation. The latter (including China, Taiwan, Hong Kong, Japan, Malaysia, Singapore, Korea etc) have rapidly growing standards of living, huge GDP growth rates, expanding populations, modest to high inflation, autocratic styles of government (which seems to work) and a vigor and vitality for hard work unmatched around the world.

The main differences are obviously cultural and, how they approach social welfare: namely, education, retirement pensions and health.

The Scandinavians adopt the maternal approach and subsidise everything - its completely "free". Services are supplied and organised by government, not the private sector, and are paid by very high taxes, both corporate and income. It is sustainable due to the tax base (with very few loopholes - IKEA aside!), the innovation of the population and in particular with Norway, the ability to save and invest the proceeds of its lucky mineral deposits in sovereign wealth funds, for future generations to enjoy.

The Asians adopt a laissez faire approach, and mainly let the private market supply (or not supply) such services, and this relatively free market has created a diverse range that cater to almost all levels of society, but of course many fall through the gaps. Some Asian nations are more proactive in this regard, some are still growing a middle class that can afford to pay for this out of their own income. The long term projection is the majority of Asians in the 21st century will pay for their own education, health and retirement. As long as disposable income growth exceeds inflation, this capitalistic model will continue to flourish.

What has this got to do with Australia, a land of fantastic mineral wealth, boundless plains, a secure and strong economy that weathered The Great Crash of 2008?

Our current Path

We have a hybrid version of (or bastard depending on your ideological slant) the Asian/Scandinavian model.

High corporate and personal taxes, but high transfers of revenue for social welfare purposes, and widespread loopholes and gaming of the system (a very Asian way of approaching taxation!)
Private superannuation (ala Singapore) but large ingrained support, including medical, dental, pharmalogical and optometric for pensioned Seniors and low-income citizens
Capitalist economic system, with a hands-off approach to market regulation, but deep interference in politically sensitive sectors and marginal issues.
A reliance on mineral wealth exports to increase disposable income and government revenue, but no savings or investment thereof, with extremely high levels of private debt.

Because of this hybrid: a quasi market-socialism based culture and economy, I think the future, assuming no bumps in the road, will more likely resemble Southern Europe than Asia or Scandinavia.

Not necessarily a bad thing if you've spent a summer or two in Greece, Italy or Spain, but in reality, our young nation does not have the psychological wherewithal to "endure" such economic malaise.

But all of our economic commentators, pundits and spruikers maintain that Australia's future is as bright as ever, that the sun shall never set on our wondrous economic boom - so how can we end up like some PIIG basket case, the "white trash of Asia"?

Many problems - not issues - and a drastic leadership deficit
Here are the problems I foresee:

over reliance on mineral wealth
hugely complicated taxation and welfare system
structurally unsound economy, based on private debt and consumption
ever expanding dependency ratio (i.e more retirees/welfare recipients per worker)
lack of investment in education, infrastructure and regional development
too many layers of government and bureaucracy

First of all, we are truly "The Lucky Country". Imagine for a moment, an Australian economy completely devoid of either an agricultural or mining sector. Yeah. Where would our current prosperity come from? Why would the dollar ever be over 50 US cents? How would the property bubble have formed if a generation of carpenters, bricklayers and truck drivers weren't getting paid $140,000 a year for semi-skilled labor?

So what have we done with this wondrous wealth? Have we saved it like Norway (approx. US$512 billion in October 2010, annual income exceeding US$70 billion as of 2008/9):

Or did we p%ss it up against a wall?

Given the brouhaha over the proposed Mineral Resources Rent Tax, any attempt at establishing a sovereign wealth fund by funneling surpluses from a mining boom, or even partial nationalisation of natural resources (e.g offshore gas fields that will produce enormous wealth in the generations ahead) will be met with indignation by both sides of politics. The "Stupid" Party will want to use the revenue to expand welfare and feel-good environmental solutions, whilst the "Evil" Parties will want to lower the tax base in a continued attempt to sustain the unsustainable debt binge imposed on Australian households.

Our tax and welfare transfer system is now beyond a joke. Its not the fact that over 42% of households receive transfer payments (i.e net pay no tax at all), a bill that makes up more than a third of the current Federal budget. Its the ridiculous nature, permutations and useless inefficiencies built into the ever-expanding tax code. Further, the tax base has shifted to the upper middle class (the upper class pay barely any tax on a relative percentage basis, due to numerous loopholes and an entrenched taxation industry), whilst the transfer base has expanded from the deserving lower class to almost all the middle class and anyone defined as a "working family".

This ties in with the ever increasing dependency ratio - more and more so-called "working Australians" now shoulder the financial burden of looking after an ageing population and a subsidised middle-class Australia. As The Unconventional Economist has pointed out, as the Baby Boomers retire and earn significantly less, the burden of high income - from which almost all taxation revenue, including property tax, spending and income taxes - falls to Gen X and Gen Y who struggle with record high mortgage repayments, whilst their Baby Boomer parents spend less (reduced GST revenue) and save more (no tax revenue, as almost all pensions and savings accounts for seniors are tax-free).

Note how the real growth in population in the coming years are the Baby Boomers - note the huge gap filled by the 35-50 year old Gen X. A quick reminder: without our extremely generous migration rate, (which fell 30% year on year recently) the natural growth rate in Australia is below replacement (currently 1.9 and falling. 2.1 births per woman is required to maintain a steady population)

Who is going to continue to fund the ever expanding middle-class welfare? Given the ideological entrenchment of "no deficit spending" by both sides of politics, the fund gap will not be borrowed. That leaves taxation as the answer, which will crush any GDP growth or creation.

Further, contrary to popular opinion our "strong and sound economy" is based on an illusion. I've touched on this above - we have record high levels of private debt, with record low levels of government debt. All "investment" in Australia is purchasing existing houses off each other at higher and higher prices. To do so, we have borrowed over a trillion dollars, almost half of which had to come from overseas because of the lack of domestic savings (due to structurally low interest rates, which had to be lowered by the RBA because how else could First Home Buyers afford to borrow enough to buy a house of the Second Home Buyer, who then buys a house....).

Lest I remind you what a problem this has caused overseas: Australia is not different. I firmly stand in the camp that house prices are artificially high by at least 40%, and that they will not go up, in nominal terms for the next 10 or so years - either because of an outright property crash, or more likely, a generation long Japan-style deflation.

Whatever the outcome, the stark fact remains that the economy is based on exponential expansion of debt, created by banks as loans against existing dwellings, and then deposited into the economy as freshly printed money, thus creating inflation and thus the illusion of economic growth. This system has endured due to our record terms of trade via mineral exports. But it has an end point. I contend we reached it in 2010, although further artificial stimulus may prolong its drug-addicted life for another year or so at best, until it succumbs to its deserved death in 2012.

The final problem is the lack of government debt, a serious lack of investment in education, infrastructure and regional development and a widening "leadership" deficit has hampered the entire nation as we try to compete on the unlevel playing field that is unbridled Asian capitalism. Federal government debt is far, far too low - contrary to the ranting and ravings of the neoconservatives.

Our education system is broken, with a huge fiscal reliance on foreign students, and the unintended consequence of reducing our higher places of learning, research and development into "degree factories". The lack of harmonisation and any substantial investment in education - e.g there is no Federal Minister for Education - save some token gestures (free laptops. Whoop-de-frickin-do.) is holding back our children's potential, particularly in areas where we need to succeed AFTER the mining boom: science, technology and high-end manufacturing. There is no way - none at all - that Australia can compete in any low or semi-skilled arena due to our population base and distance from economic centers of activity. This country needs an education revolution - stat!

The NBN is a revelation however. A serious chance at developing some game-changing infrastructure, but I doubt the current economic managers have a clue how to roll it out effectively. Unfortunately their opponents - who are likely to be very successful at its oversight, want to scrap the whole project.

But what about high speed rail and transport infrastructure - not just for the mining sector, but for all sectors of the economy, that could provide huge returns in terms of productivity (which continues its 5 year decline). As I touched on in my "levees" post, where are the bold plans to "Flood Mitigate" (you can't flood proof anything) Queensland, or an Australian-wide water and food security system, which although economically inefficient, has future strategic implications?

For those who say we can't afford a larger national debt - say 40-60% of government debt to GDP, I say this. Would you rather we have houses that cost $600,000 and half of all mortgages owed to foreigners, and a crumbling education and infrastructure? Or a house that costs $300,000, a 21st century education and infrastructure system and a higher tax rate, the difference being your taxes go to service Federal Government bonds, most of which will be owned by Australian superannuation funds and give Baby Boomers a real income stream in retirement.

Now you see why I say we have a leadership deficit? Where are the leaders (not managers) putting forth such ideas and notions? Or are we condemned to mire in the muck of political compromise for yet another generation of spin-doctors and god-awful speeches?

Why we won't go Asian (although we might turn Japanese? I don't think so)
Culturally, we have adapted well in becoming an advanced, capitalist society. We may have "civilized capitalism" as Philip Adams says, but have we civilized our socialism?

I contend that culturally all Australians at heart are socialists - where more than anywhere in the world have you heard the phrase "the government should do something about it"?

Has anyone really celebrated the privatisation of Telstra, the Commonwealth Bank (which partly enabled a "competitive" market for unbridled credit creation) or how we are treated by private healthcare providers?

Does anyone really think that as the largest (but not greatest) generation starts their retirement they will demand less government support - particularly health care? Particularly as their own private superannuation depends almost wholesale on grossly overvalued residential property and a share market that could plunge 20% at any time? (ah, the beauty of volatility!)

We are not American, language similarities aside. Although we had a pioneering spirit like our American cousins and our colonial past was a hard, taxing life, we continue in the tradition of the fair-go and government paternalism as a given, in fact, as a demand that the State have a large say in our life, lifestyle and economy.

Both sides of politics are equally unsatisfactory in their approach to our capitalist/socialist conundrum. Partial subsidisation of education costs, but support for private schools. Increased Medicare and support services, but mandatory private health for high income workers. Tax free pensions for retirees, but higher taxes for the late Boomers and Gen X high income earners. Higher skilled migration rates, but lower investment of skilled education. It never ends, and sometimes even the "capitalist" Coalition adopts socialist measures (e.g paid parental leave) whilst "socialist" Labor adopts capitalist reforms (e.g market solution to carbon mitigation).

I don't have any solutions, just a notion: let us forget trying to forge a "middle way" (i.e stop listening to the Gordon Browns, the Kevin Rudd's et al of this world), and make a decision: are we going to be part of Asia and adopt a hard-nosed capitalist approach to social welfare, wealth distribution and growth-based prosperity, or should we just fully socialise, recognize our cultural heritage and be the Scandinavia Down Under?

With better beaches of course.

Cyclones, Floods and Levies (Levees?)

2011-01-28T16:08:00.001+08:00

Well this is great news: just a few days before I leave to go to Queensland, a tropical cyclone is right on track to hit our area this weekend.
For reference, I live just above Bunbury: i.e in the middle of the forecast path.

Its not as bad as the storm in a teacup re: the Gillard Flood Levy.

Given that well over 40% of the households in this country receive more money than they pay in taxes and that over $109 billion was spent on social welfare in the 2009/10 Budget, the puny amount raised by the levy (around $1.8 billion) pales into insignificance.

I wonder though what would have been more efficient:

Borrow the money by selling Australian government bonds (a market that desperately needs more liquidity so our myopic fund managers can stop buying BHP and the banks, inflating their share prices, and actually allocate capital properly), providing a welcome home for genuine savers, OR
Take the money off the wealthy, and waste about 20-30% of it on collection and accounting/bureaucratic malaise at the ATO (and countless HR departments around the country)

Sure, the former would create an income liability stream that needs funding, and would raise the national debt (which would again focus the mainstream commentariats effort on bashing the government on its extremely minor total debt position, whilst ignoring the real debt problem: households and State governments).

But the latter will inevitably result in unintended consequences, particularly the more wealthier using many available loopholes to legally reduce this new tax (although negative gearing won't be one of them - as pointed out by The Unconventional Economist, most property "investors" (sic) are in lower tax brackets than those affected materially by this levy), and the inevitable wastage and inefficiencies that go with collecting a new, temporary tax.

Had the Gillard Government been bold and gone for Option 1, and extended this to say, $20 or $30 billion and planned a major infrastructure initiative, including a widespread flood mitigation system for the entire state of Queensland, in the long run, would that have been a bad thing?

As I've stated before, this country suffers from four deficits, one is minor but could blow out of control due to the structurally unsound property market ala Spain - the Federal budget; two will eventually come back to haunt us as we squandered a whole generation's wealth and purposely destroyed our manufacturing industry and high skill base (the trade deficit and the savings deficit - i.e record household debt), but the one most in deficit in this country is leadership.

My Trades - as of 24th January, 2011

2011-01-24T19:08:00.001+08:00

The table below summarises all suggested trades on this blog, mentioned in End of Week Market Analysis and any individual security summaries.

Accumulative Profit as of 24th January is $2474.

What does that mean? It assumes I have opened 1 option contract, 500 warrants or a 1000 share parcel in each suggested trade.

In reality, I would have different capital allocation decisions depending on the trade risk profile/equity at risk and other factors.

In my monthly performance updates, I will disclose my actual equity results on a percentage basis, which includes brokerage, slippage and other costs.

Post Date	Suggested Trade	Confirm Date	Codes	DA	Exit Date	Profit/Loss	Accumulative
10-Jan-11	XJO Feb 4700/4650 BPS	10-Jan-11	TN7/TM7			$180	$180
	XJO Mar 4900/4500 Strangle	10-Jan-11	UB8/U28			$1,000	$1,180
	BHP Feb $44/43 BPS	12-Jan-11	EZ7/K27	YES	21-Jan-11	-$50	$1,130
	RIO Feb $84/83 BPS	13-Jan-11	TK9/CF7	YES	20-Jan-11	-$140	$990
	WOW Feb $26/25 BPS	11-Jan-11	V58/V18	YES	20-Jan-11	$90	$1,080
15-Jan-11	XJO Feb 4700/4650 BPS	14-Jan-11	TN7/TM7			$100	$1,180
	XJO Mar 4600/4500 BPS	14-Jan-11	U58/U28			$174	$1,354
	CBA Feb $49.50/49 BPS	14-Jan-11	FK8/UF7			$170	$1,524
	WBC Feb $22/21.50 BPS	NYC	LT9/LP9				$1,524
	WBC Mar $21/20 BPS	14-Jan-11	FI8/FH8			$130	$1,654
	MQG Feb $39 long call	17-Jan-11	SQ7	YES	24-Jan-11	$80	$1,734
	MQG Feb $37.50/37 BPS	14-Jan-11	NU7/NY7			$80	$1,814
	MQG Mar $35/34 BPS	14-Jan-11	Z29/Z19			$75	$1,889
	BHP Mar $42/41 BPS	14-Jan-11	Z28/YX8			$120	$2,009
	RIO Feb $84/83 BPS	14-Jan-11	TK9/CF7	YES	20-Jan-11	-$60	$1,949
	WOW Feb $27.50 long call	17-Jan-11	R58	YES	20-Jan-11	$45	$1,994
	WOW Feb $26.50/26 BPS	14-Jan-11	QX8/V58	YES	20-Jan-11	$15	$2,009
	WOW Mar $26/25 BPS	14-Jan-11	FQ8/FP8	YES	20-Jan-11	$15	$2,024
22-Jan-01	XJO Mar 4600/4500 BPS	24-Jan-11	U58/U28			$200	$2,224
	CBA Feb $49.50/49 BPS	21-Jan-11	FK8/UF7			$130	$2,354
	WOW Mar $29/29.50 BCS	20-Jan-11	FY8/G58			$120	$2,474

Defensive Actions (DA column) since last update:

MQG long option trade closed on the open 20th January due to KC Signal confirmation
All bullish WOW, RIO and BHP trades were stopped out on the 20th of January due to "End of Uptrend" price action analysis.

Legend:

BPS - Bull Put Spread
BCS - Bear Call Spread
Blog Entry Date - date suggested trade was mentioned
Confirmation Date - date when trade was opened, on confirmation of entry signal.

Notes to Table:

Currently open trades obviously have no "Exit Date" entry, but initial profit (premium on entry) or loss (capital allocated, e.g shares bought) is calculated
Entry and exit price are calculated from closing price on Confirmation Date
Profit/loss is calculated per option contract (1 XJO point is $10, 1 equity option cent per contract is also $10 - 1000 shares per contract) or per 1000 shares or 500 warrants (assumed leverage of 50%).
A long call or put or purchased share or warrant has an immediate "loss" as a debit is made, whilst a sold call or put or credit spread has an immediate "profit". Final profit/loss is calculated on exit.
No brokerage, ACH fees, slippage (buy/sell spread) or liquidity/fill problems are assumed or calculated.

Important Information:

The content, information and any advertisements of this blog should not be taken as investment advice nor a recommendation to buy or sell, or utilise any strategy mentioned. The author may or may not have a underlying position or is considering a position in any or all of the securities or strategies mentioned. You are responsible for the outcome of your own actions, seek advice before investing or trading your own capital.

Classic Calvin and Hobbes....replace "lemonade" with "property"

2011-01-24T18:59:00.002+08:00

subsidized = FHBG, RBA low interest rates, demand equals "underlying demand" and so on...

Is there any better description of the so-called "free market"?

I know of a few economists and spruikers who could match Calvin's attitude here, but that would be insulting to Calvin....

End of Week Market Analysis - 22nd January, 2011

2011-01-24T15:36:00.003+08:00

The S&P/ASX200 Index (XJO) closed the week at 4755 points, below long term resistance at 4800 points. The jostle between the bulls and bears continue, with BHP and RIO (discussed in detail below) dragging the market back after a one-day leap across the pivotal 4800 barrier.

Trend - the short term trend is flat, with 15 day EMA going nowhere, but the medium term trend is still intact, with price above the trendline and 13 week EMA.
Momentum - crucially, medium term momentum will not penetrate the upper signal line. This is no new bull market. In the short term, momentum is positive, but sideways.
Direction - in the short term, directional strength confirms price action analysis: a positive bias, but no strength. Medium term directional strength is waning, but remains positive.
Cycle - the medium term cycle remains bullish, although intra-week did fall below a "bull" signal. This weakness extends into the short term cycle, although a break below the 0 line did not eventuate (which would indicate a short term correction)
Support - support remains at 4700 in the short term and 4200 in the medium/long term.
Volume - medium term volume is flat, but positive, whilst in the short term, has dipped below zero for the first time since the new year week-long correction.

Conclusion
XJO remains a frustrating market, best served at the moment by either standing aside or non-directional trades, with a bullish bias - although the brave few could utilise a long term bear trade at 5000 or more points (I'd book up on macro factors there though! Although I personally believe the current market is overvalued and Australia is heading into a long recession, I can't say the same for those who actually move markets. I find "Jesus" whenever I'm wrong!)

XJO medium term trade: March or April 4600/4500 Bull Put Spread

The Banks (CBA, WBC, MQG)

Commonwealth Bank (CBA), as expected last week, is in a small uptrend which is gathering momentum.

Trend - the short term trend is up, with price action all above the 15 day EMA and no closes below the 7 day HI EMA. A medium term trend from the low's of November 2010 may be developing, with current activity in the upper area of a trend channel. Recent price action is above the long term 260 day EMA, which is bullish.

Momentum - In the short term, momentum confirms a continued short term uptrend, but medium term momentum indicates a bear market rally only at this stage.

Direction - short term positive strength is dropping slightly, but still confirms above signal line. The medium term PDI has just crossed over the NDI above the signal line, but NDI has not crossed below 20 - trade management rules deny any medium term or large capital allocation until this level drops.

Cycle - the medium term cycle is now bullish, supporting local/short term cycle.

Support - there is localised support at $49.50-$50 in the short term and $47.50 in the medium term. CBA reached a high of almost $60 in April 2010, which could be this moves target?

Volume - volume is positive on both scales, although I'd like to see a higher number of the short-term Force Index.

Conclusion
CBA is in a short term trend that wants to manifest itself as a new medium term trend, with a possible target of $60 (by around the end of April?) These are VERY early days yet, and I would caution any medium term trades or capital allocation until CBA earning's announcements on the 9th of February, with ex-dividend on the 14th (possible dividend yield play here...)

CBA short term trade: Feb $49.50/$49 Bull Put Spread

Westpac is again trying to break out of its medium term sideways bearish funk. As mentioned in last week's analysis, a short term uptrend was trying to form, but entry was denied by lack of confirmation by secondary indicators. Permission has since been granted.

Trend - the short term trend is up, with classic price action gravitating around the 7 day HI EMA, with no intra-day action touching the 7 day LO EMA. The weekly trend is weak to non-existent.

Momentum - Like CBA, WBC is technically in a bear market, so any momentum that reverses but is yet to break into positive territory, or cross the upper signal line suggests a very short term rally. Medium term momentum indicates a reversion to the mean and does not yet suggest any sustained price action.

Direction - The medium term NDI continues to drop, but has not crossed below the lower signal line, whilst PDI floats below. This is reflected in the short term DMI readings, although NDI is obviously dropping, but not yet below the lower signal line.

Cycle - the short term cycle is bullish, with a great indicator confiriming the end of the previous correction and the start of a new short term trend. The medium term cycle is now sideways bullish.

Support - there is localised support at $22 in the short term and $21 in the medium term. WBC reached a high of $28 in April 2010, a long way off its current price. There is a sloping resistance line at $23 - a weekly close above this level (this or next week) would strongly suggest a new trend.

Volume - volume is positive on both scales, rising in the short term, but flat medium-term.

Conclusion
WBC is in a weak short term uptrend, yet to be fully confirmed. Structurally it remains in a sideways bearish stance. I remain cautious about putting on any bullish trades (of any substance) at this time.

Macquarie Group (MQG) has finished the week flat after a great breakout. As mentioned in last week's analysis, a KC Signal was forming - and then confirmed with a bearish engulfing candle on the 20th. Good entry point for long share/warrant traders, bad exit for long option (volatility) traders.

Trend - the short term trend has finished, but it is likely to move sideways. The weekly trend is a flat base pattern which suggests continued bullishness. Although the close on the 20th was very bearish, it did not break the trailing stop nor close below the 7 day LO EMA.

Momentum - Medium term momentum is now positive and moving towards the upper signal line to confirm a new medium term trend. Short term momentum, after a classic KC Signal, has retraced but still positive, above upper signal line and own EMA. This signals continued strength.

Direction - The medium term PDI has crossed the upper signal line, which confirms a new medium term trend. This is reflected in the short term DMI readings, with a very strong ADX signal line (which I use rarely) suggesting overbought conditions.

Cycle - the short term cycle remains bullish, although it has dipped below the 100 line. The medium term cycle suggests overbought, but is reverting to more sedate conditions.

Support - there is localised support at $39.50 in the short term and $37 in the medium term. Historical resistance at $40 remains a barrier to a continued move, but will become support if it gets underway.

Volume - strong volume signals on both scales (positive since October 2010) but flat in the short term.

Conclusion
MQG has had a great run in the last couple of weeks and is now consolidating before its next move, as it appears overbought. Most secondary indicators suggest a new medium term trend, but the key signal is a crossing of the upper line on medium term momentum, reinforced by a new support area of $40. Be quick on MQG, as always.

MQG possible medium term trade: long warrant/share, on confirmation

The Miners (BHP, RIO)

BHP Billiton (BHP), ended the week poorly, although it found some support, on nervousness about China and its runaway economy.

note close below the trendline but not the 63 EMA (green line)

Trend - the short term trend is sideways at best, down at worst, with choppy price action, although supported by the 63 day EMA/13 week EMA. Weekly price has closed below the medium term trendline and all moving averages have 'stacked'. This is bearish for the short- and medium-term.
Momentum - Medium term momentum has failed to make a new high 3 weeks in a row, but it is still above its own EMA and upper signal line. a bear market rally only at this stage. Short term is below 0 and own EMA, suggesting continued weakness.
Direction - The medium term PDI has dropped significantly, but is still above its lower signal line. NDI is also very weak. No directional confirmation here at all. Conversely, short term NDI has crossed over its upper signal line due to Friday's poor close. But, PDI is still above its upper signal line. Again, no confirmation here either.
Cycle - the short term cycle is now bearish, having dropped below -100. The medium term cycle however, has moved from bullish to sideways bullish. This is the clearest signal that a correction is not underway. Yet.
Resistance - there is signficiant resistance at $46 for BHP, near a 3-year high. i.e BHP is approx. where it was at the height of The GFC Episode One - "The Credit Menace". There is localised support at $44.50 and $43.
Volume - volume is slipping on both scales, although in the short term it is now negative, in the medium term it has crossed its own EMA - a clear sign of lack of buying support at these high prices.

Conclusion

BHP is at a cross-roads. Will it continue its truly awesome strength and reach new 3 and 4 year highs on the back of increased commodity prices (due to the profilgateness of the US Federal Reserve)- or is it too geared to the miracle China story? Again, I'm looking at a combination of price action (a continued fail below the medium term trendline) and momentum before acting.

BHP: cover all bull trades, stand aside.

Rio Tinto (RIO), like BHP, ended the week poorly, and continued its sideways action. Are we still witnessing a bullish flat base pattern?

Trend - the short term trend is down, with lower highs in the past few weeks, although price remains supported by the 63 day EMA/13 week EMA. Weekly close is barely above the 13 week EMA. This suggest continued sideways action for the short- and medium-term.

Momentum - Medium term momentum has now fully slipped below the upper signal line (signifying a sustained medium term trend) but still remains above the lower signal line, indicating continued bullish support. Friday's close took short term momentum to below zero, but EMA is still neutral sideways.

Direction - Short term NDI has crossed over its upper signal line due to Friday's poor close and PDI is now below its upper signal line. This would normally confirm a new correction is underway.

Cycle - similarly, the short term cycle is confirmed as bearish, having dropped below -100. The medium term cycle however, has moved to sideways bearish only, but it is closely reverting to a bearish position.

Resistance - there is signficiant resistance at $88 for RIO, or back to where it was in September, 2008 - similarly to the where commodity prices were then and now... There is localised support at $84 and medium term support at $81.50/82 area.

Volume - the short term Force Index has been broadly negative for RIO since November 2010, slipping past a support level, whilst it finished the week in the negative on the medium term scale. Like BHP , this indicates a lack of buying support at these high prices.

Conclusion

Is RIO stabilising after a great run up from September to December ($72 to $86) reflecting the Fed's QE2 program - OR - is it getting ready for a large pullback as signs abound that not all is well? Just like BHP, I'm looking at a combination of price action (a breakout above resistance at $88 or a failure at $82) and momentum to confirm before acting.

RIO: cover all bull trades, stand aside.

Woolworths (WOW) Last but not least, let's look at WOW. After a very quick uptrend, WOW has finished the week bearish, with a large sell-off before announcing profit guidance on Monday. Given that JPMorgan recently upgraded WOW to a buy - a great contrarian signal - does this bode well for next week's action?

surfing W O W....
Trend - the short term trend was sideways bullish and then quickly reversed, although price did not close below the 7 LO EMA, it broke the current trendline. Weekly close is still above the 13 week EMA, but all moving averages are clustering (and frustratingly, the 260 day EMA remains flat).
Momentum - Medium term momentum remains below zero and its own EMA and is slipping. Short term momentum has closed below the upper signal line and its own EMA which is very bearish.
Direction - Short term NDI has crossed over its upper signal line due to Friday's poor close, with PDI now below its upper signal line. A crossover is not yet in place. This would normally confirm a new correction is underway. On the medium term scale, NDI is still above the lower signal line, which confirms that the short term trend has no hold, even though PDI is rising.
Cycle - The medium term cycle attempted a change to a bullish sideways stance but is now neutral. A KC Signal in the short term cycle was confirmed with a move back to sideways bullish. For WOW - which has constant short-term cyclical moves, this signal is very bearish.
Resistance - WOW has a very long term resistance at $30 and support at $25.50. Localised support at just over $26 is a probable price target in any continued downtrend. A break below that area is unlikely, but makes for great investing opportunities.
Volume - the short term Force Index spiked before ending the week below its own EMA, another bearish sign. On the medium term scale, it still remains positive.

Conclusion

WOW remains one of my favourite stocks to trade (and company to invest in - sly and demoralising sales tactics it uses with farmers aside) and continues to show that favouritism! I closed a number of trades intra-week due to the volatility and remained concerned at Monday's earnings announcement. Given WOW's previous behaviour, the only trades to consider at the moment is a long dated Bear Call Spread near historic resistance (very low payoff, high probability of success) or a cash secured put for investment purposes (say at $26 or $25.50 level)

WOW short term trade: cover all bull trades, March $29/$29.50 Bear Call Spread

Note: one of my readers recently timed a covered call trade on WOW to perfection - with Friday's fall he made a 14% annualised return, but he is keeping his WOW shares for the long term (doing the trade in Self Manager Super Fund (SMSF). A great strategy combined with cash secured put buying for those with the time, capital and nous to add a few more percentage points of performance to your biggest investment (no your house doesn't count!). I intend to post on this "Super" trading system in the near future. Watch this space.

New Superblog - Macrobusiness.com.au

2011-01-24T10:05:00.000+08:00

Well, three of my favourite bloggers:

Houses and Holes - by David Lwellyn-Smith (formerly of Business Spectator)
The Unconventional Economist - by economist Leith van Onselen
Delusional Economics

Have joined forces with a fourth (Sell the news) to form a "super-blog" that collates all four, plus adds some excellent resources and links.

Macro Business

In their own words:

MacroBusiness was formed by four bloggers who reckon the gap between the Australian business media and reality has widened to a gulf.
That this is possible without the heavy-hand of a dictator is testament to the power of vested interests, monopolies, weak government, closed ideologies and a perennial culture of populism.
In effect, it means our leadership class can make unaccountable economic and business blunders, or, they are measured against entirely inappropriate yardsticks.
At MacroBusiness we use reason, history and ideas to bring you a bigger picture of the choices we face for our economy, businesses and investments.
We are the hedge fund of Australian business media.

I think they will eventually form a better alternative to the major aggregator of financial news and opinion, Business Spectator.

I have changed my blogroll to reflect the amalgamation and wish them all the best. For those of you who still watch/listen the major commentators on the mainstream press (e.g AFR, Channel 7/9/10, The Age, The Aussie etc ad nauseam), for shame!!!!

Its very very qwuiet...and a road to nowhere...

2011-01-21T07:31:00.001+08:00

Sorry for the lack of posts/content, I've been busier than a one-armed bricklayer in Baghdad, putting/closing trades amongst this current action AND developing a new website for my investment company (still in test phase) .

And if you haven't noticed, I've also made some changes here - wasn't happy with the standard template so went out and modified a Wordpress one and here we are!

In the midst of all this, my wife and I are moving house (going back to soggy Queensland) and planning a loooooong trip - we are driving/riding across Australia, from Bunbury WA to Hervey Bay QLD, about 4900kms.

We leave on February 1st and will arrive Feb. 10th or 11th. I'll still be trading and online - intermittently, but enjoying the trip nonetheless, because flying stinks!

Monday's action - not so quiet....

2011-01-17T18:33:00.007+08:00

Kalgoorlie Superpit - or your trading account if you're not careful

A very poor day today on the XJO - down 38 points or 0.8%, due to most of below:

BHP closed below 7 day HI EMA, long red candle, local resistance at $46. Medium term weekly trend still intact (from late August 2010), watch for close below $45 in coming days to signal reversal
CBA Bearish engulfing candle - not unusual in an uptrend, but definite resistance at the $51.50 mark. I am long term bearish on the banks (due to the coming debt deflation) but I can't let this sway my short term trades. Having said that, might be time to add to this call and place a medium term Bear Call Spread (say $54 or $53 lower strike, March/April expiry).
MQG uptrend with long shadow - KC Signal possible retracement/sideways. Awesome volatility for any long option holder out there (hello!), but I am concerned about a reduction in value if goes sideways from here. Hasn't closed above historical resistance (at approx. $40.25ish). In fact, the recent 1 year daily chart of MQG looks like a simile of the late 2008 to mid-late 2009 chart....

GFC after-math

current activity...although the rebound from the low isn't as dramatic

RIO close below 7 HI, long red candle - almost closed below 15 EMA. Seems to be forming a triple top - not many buyers beyond $88 or so. Hmm.
WBC Bearish engulfing candle - that's it, I'm convinced WBC will stay in a sideways bearish mode for awhile. I'm keeping my March $21/20 BPS (lost 2c per spread contract so far on an initial 13c spread), but will go bearish with either a $23.50 or $24 Bear Call Spread (BCS), probably Feb or March, depending on if I can get filled and if the spread is worth it.
WOW fast uptrend with long shadow - KC Signal possible retracement/sideways

XJO itself has bounced off the critical 4800 points level again, and I frankly am getting quite frustrated with this!

I have a modest 4700/4650 Bull Put Spread open on XJO at the moment, but according to my defensive action criteria, I will leave it well alone until the sold position doubles in value (one of my specific stop losses).

It might be time to exit my WOW trades (long and BPS) too - although it hasn't triggered any of my exit signals yet, I have a tidy profit so far. Again, I don't take much credence in directional plays on WOW, but I will keep an eye on this - and keep you updated!

As an aside, I believe WOW is one of the best companies in the ASX50, and have heavily researched it as part of my private investing company - Empire Investing (closed to new investors unfortunately!). I also personally invest in WOW through my SMSF (self managed super - come on, start to learn the acroynmns!) using a cash secured put strategy. More on this strategy later, which, combined with what I call a "over-valued" covered call strategy, I intend to adopt as a longer term trading plan for super and possibly, Birch Creek.

I will probably add to my hedge on XJO in the coming days, and will be watching the overnight markets for a lead (like everybody else), although the US market is closed for Martin Luther King day.

If Europe appears to be correcting, I will use a 24-hour Index CFD (or Option CFD) as my hedge, although I've never had much luck with CFD's!! (Gold is an exception, but mainly due to following some very good trends last year). As of 6pm local time, WA, the European market is down, on aggregate by 0.5%, mainly due to FTSE and CAC (France).

I follow another watchlist, appropriately called my "Crashlist", which includes the following:

Australian dollar/US dollar currency pair
Baltic Dry Index (not much use actually, but interesting to watch)
10 year US Treasury yield
China Shanghai Composite Index
Dow Jones Industrial Index (USA)
Euro/US Dollar currency pair
FTSE 100 Index (UK)
DAX Index (Germany)
Gold USD per oz
Hang Seng Index (Hong Kong)
Nikkei 225 (Japan)
NASDAQ Composite (USA)
S&P 500 Index (USA)

I've tried to put live charts on the bottom of the blog for some of these, but I usually analyse them using my Incredible Charts software. (I use the premium version, a free version is available with delayed data and advertisements, but is more than capable for the infrequent trader)

More on the "Crashlist" and how I use it in other post. For the time being, keep your powder dry and watch this market closely. I think the full effect of the QLD/Victorian floods crisis has yet to be priced in (although BOQ/SUN have been dealt some serious blows)

Exiting a trade

2011-01-17T13:54:00.002+08:00

I contend that the exit is more important than the entry. This insight took almost 2 years of trading time to understand!

In this post, I'm going to show you my technique for how I exit a "long" (i.e have bought to profit from price going up) short term and medium term trade.

Please note that this method works well on my "Seven" - I know it doesn't work well on mining stocks outside of the ASX100 or 200, which have different volatilities than the "blue chips". This methodology also only works in the current sideways market environment - you have to adopt new techniques for outright bull markets.

There are 3 schools of thought with taking profits: don't (buy and hope), sell into strength (i.e sell on a good strong up-day) or ride trend until it tells you to get off. I do the last as much as possible, but sometimes I go with my gut feeling and sell into strength. So far this hasn't worked out, as I've left lots of profit on the table, so I've structured my sell to be as disciplined as possible.

My Methods

Short term trend - I'm trading a short term trend, and have been riding the trend for about 5-10 days. I'm sitting on an okay profit, but am wary about future price action. My "sell-sell-sell" internal indicator (my gut) tells me I need to take a profit, but what does the price tell me?

The biggest sticking point is seeing a down "red"-candle day on your charts - say the price dropped 0.5 or even 1% or more in a day? Should you get out? If this happens, I look at the following four signals:

close breaks uptrend line
close below 7 day LO-EMA (more on this below)
short term momentum closes below own smoothed average and/or 2% signal line
short term cyclical was above 100 (which indicates a continued trend), and then turns below 50

If all four signals occur, I exit. This works about 75-80% of the time and subsequent price action confirms I covered my profit at a good time. Unfortunately, sometimes it will rebound the following day.

Medium term trend - as above, but I add a fifth signal, with a close below the 15 day EMA. Again, sometimes this doesn't work and the trend starts again after a short correction. As I only watch 7 stocks, I am watching for these new opportunities, and have time to analyse the long term price action, which may still indicate a structural uptrend is still in place. There is no crime or shame in re-entering a trend after you have exited. The markets are amoral on this point.

A sidenote on indicators: these work for me as I have a low tolerance for holding periods (I average less than 20 days on directional trades), but may not work for other stocks or strategies. I have other systems I watch in parallel, as I get ready for markets to change behaviour. Current price activity (since around August 2009) is very hard to trade from the directional side - this may change in the months and year's ahead!

Price Patterns
There are distinct price patterns that can also indicate the end of the trend. I will cover two here: the bearish engulfing candle and the "inflation" pattern.

The "inflated" price pattern, which resembles an arc - works on both short term and very long term price activity, as it is a direct reflection of the participants. It usually starts with a breakout from a previous correction and then the "bubble" is pumped full of air before reaching a flat-line point.

The classic "inflation" is March 2009 to May 2009 (see the Dow Jones chart below). This fits a curve very nicely - remember to use semi-log scale charts, not simple linear charts for long term analysis. I only use linear scale on less than 3 months daily charts (but not for options, which can leap several hundred percent in days).

The "Bernanke" curve - a classic reflation.

But this pattern works well on very short term activity too. The chart (below) shows a recent short term trend for Commonwealth Bank (CBA). The blue and red lines are the 7 day EMA, but based on high and low of the day respectively.

note fit of curved (black) line and 7 LO (red line)

The black line is a fitted curve showing the "inflation". Of course, this can only be fitted perfectly, after the fact, but during a trend gives a good indication of current price action.

from Chartpattern.com

The crest of this pattern is known as an ascending triangle (see above), usually quite bullish. Indeed, price may go sideways for a while and then breakout and start a new, more linear trend.

What you are witnessing - in both the short and long term - is the behaviour of market participants, which may or may not be a reflection of fundamentals. Its all perception - what I do is read perception.

Bearish engulfing candle - (see diagram right) - is very easy to explain. A quick primer on candles, they are just a fancy way of showing the high (upper "wick"), the low (lower "wick"), the open and close of that day's (or week or month) price action. If its a down day you get a black or red candle, and the top is the open, the bottom of the candle is the close. For an up day, vice versa (white or blue).

With the bearish candle, you are witnessing a new opening high, but then sentiment changes during the day and a sell-off begins. Finally, the low of the day is below the previous day's open (and low), "engulfing" all price action.

I don't like to rely solely on single day price action, but in this case, the bearish engulfing pattern does work extremely well. Combined with my above four (or five for medium trends) its a clear signal to get out of town.

Summary
Exiting a trade is more important than the entry - this is where you make your money on directional trades. Picking tops and bottoms is best left for monkeys, although the occasional monkey can profit using other strategies from time to time.

Don't feel bad if you exit early and then watch the price shoot up again. Re-enter. There is no shame in this: you have not misread the prevailing behaviour of the participants, but the non-participants. Think of it this way, there might be some on the sidelines watching a new trend develop, are cautious about entering, and then take the opportunity when there is a modest sell-off.

I know this - because its a major strategy I use to enter trades for my super fund, where my time horizon is much longer. Keep this in mind and don't beat yourself up if you watch the trade runaway!

500 views and "Trades" page update

2011-01-17T11:26:00.001+08:00

It took just over a week to get 500 page-views for Birch Creek Trading!

Thank you for having a look and I hope everyone is gaining an insight. Right now, I haven't closed any trades I have opened since starting the blog, so the "guts" of the blog is yet to make an appearance. Watch this space as I hopefully make only a few mistakes, but lots of profit.....

I've updated the page "Trades" (see the tabs at the top of the blog, e.g. What I Trade, My Routine) - it now includes a table summary of all trades I have outlined in my End of Week analysis and individual "Magnificent Seven" analysis.

From there you can track if my trading strategies work well or not - I have kept the "tracking" quite simple, with identical capital allocation for each trade: either 1 option contract (exposure to 1000 shares), 500 warrants (assume 50% leverage for total 1000 shares exposure) or 1000 shares.

Of course, capital allocation is a large component of trading due to the "equity at risk" rule. Most traders use 2% total equity at risk: I vary it depending on the inherent risk of the trading vehicle.

My actual trades will differ slightly from the table summary: why?

Because I trade first and blog later! I might in the post-close afternoon analysis give some reasons to trade ZXY, but I may have already performed such a trade myself.

Almost two hours left in the day and XJO is falling - it seems 4800 remains key resistance for the time being.....

My Trades - as of 17th January, 2011

2011-01-17T08:17:00.018+08:00

The table below summarises all trades on this blog (from End of Week Market Analysis and individual security summaries) mentioned in End of Week Market Analysis.

Accumulative Profit as of 17th January is $399 per option contract/500 warrants/1000 shares.

Blog Date	Trade	Confirmation	Codes	Exit Date	Profit/Loss	Accumulative Profit
10-Jan-11	XJO Feb 4700/4650 BPS	10-Jan-11	TN7/TM7		$180	$180
	XJO Mar 4900/4500 Strangle	10-Jan-11	UB8/U28		$1,000	$1,180
	BHP Feb $44/43 BPS	12-Jan-11	EZ7/K27		$240	$1,420
	RIO Feb $84/83 BPS	13-Jan-11	TK9/CF7		$180	$1,600
	WOW Feb $26/25 BPS	11-Jan-11	V58/V18		$135	$1,735
15-Jan-11	XJO Feb 4700/4650 BPS	14-Jan-11	TN7/TM7		$100	$1,835
	XJO Mar 4600/4500 BPS	14-Jan-11	U58/U28		$174	$2,009
	CBA Feb $49.50/49 BPS	14-Jan-11	FK8/UF7		$170	$2,179
	WBC Feb $22/21.50 BPS	NYC	LT9/LP9			$2,179
	WBC Mar $21/20 BPS	14-Jan-11	FI8/FH8		$130	$2,309
	MQG Feb $39 long call	17-Jan-11	SQ7		-$1,970	$339
	MQG Feb $37.50/37 BPS	14-Jan-11	NU7/NY7		$80	$419
	MQG Mar $35/34 BPS	14-Jan-11	Z29/Z19		$75	$494
	BHP Mar $42/41 BPS	14-Jan-11	Z28/YX8		$120	$614
	RIO Feb $84/83 BPS	14-Jan-11	TK9/CF7		$260	$874
	WOW Feb $27.50 long call	17-Jan-11	R58		$45	$219
	WOW Feb $26.50/26 BPS	14-Jan-11	QX8/V58		$65	$239
	WOW Mar $26/25 BPS	14-Jan-11	FQ8/FP8		$160	$399

Legend:

BPS - Bull Put Spread
BCS - Bear Call Spread
Blog Entry Date - date suggested trade was mentioned
Confirmation Date - date when trade was opened, on confirmation of entry signal.

Notes to Table:

Currently open trades obviously have no "Exit Date" entry, but initial profit (premium on entry) or loss (capital allocated, e.g shares bought) is calculated
Entry and exit price are calculated from closing price on Confirmation Date
Profit/loss is calculated per option contract (1 XJO point is $10, 1 equity option cent per contract is also $10 - 1000 shares per contract) or per 1000 shares or 500 warrants (assumed leverage of 50%).
A long call or put has an immediate "loss" as a debit is made, whilst a sold call or put or credit spread has an immediate "profit". Final profit/loss is calculated on exit.
No brokerage, ACH fees, slippage (buy/sell spread) or liquidity/fill problems are assumed or calculated.

For ease of calculation, I have not calculated Return on Assets (ROA) due to margin requirements on sold option positions or varying interest rates on warrants, or any interest on cash held in account.

Important Information:
The content, information and any advertisements of this blog should not be taken as investment advice nor a recommendation to buy or sell, or utilise any strategy mentioned. The author may or may not have a underlying position or is considering a position in any or all of the securities or strategies mentioned. You are responsible for the outcome of your own actions, seek advice before investing or trading your own capital.

Is gold/silver entering the 3rd "Mania" phase of a bull market? (LINK)

2011-01-17T07:47:00.000+08:00

Extensive article and research on the price behaviour of gold/silver leading from the Bullion Baron:Is Gold/silver entering the 3rd phase of a bull market?

Please read in full, as it gives great insight into bubble like behaviour.

Consider this much quoted chart of bubble behaviour:

Although gold recently corrected from its all time high to $1365 or so (look at the bottom of this blog for a series of 24 hour charts and link to Kitco - my favourite precious metals trading/investing site for longer term data and analysis), this maybe another retracement point for serious buyers (speculators) to re-open or add to positions.

2011 is going to be an interesting year - the two main "events" being the continued European debt crisis/minefield and the continued ridiculous $1 trillion plus fiscal deficits of the US.

The interesting point with gold is this: its worth is extremely highly correlated with central bank set interest rates. Will gold's value plummet like it did in the last bubble of the 1970s because central banks are forced to raised interest rates due to a lack of buying of government bonds and/or to put a damper on monetary-stimulus induced inflation? (e.g Volker in the early 1980's)

The paradox is if they do raise rates, governments around the world will struggle to actually service that debt (i.e Japan, the US, most of Europe) and need either more borrowing (selling of bonds) or more money printing. Both of these act as a floor under gold - as it cannot be borrowed/printed into existence.

End of Week Market Analysis - 15th January, 2011

2011-01-16T05:01:00.006+08:00

The Market The S&P/ASX200 (XJO) closed the week at 4801.4 points, just above its long term resistance of 4800 points. Is it going to repeat the November 5 and December 23 2010 tops and correct falling, or is this a new leg in the re-flation of the Australian stock market?
Observe that the medium term trend line remains intact, on both the weekly (shown below) and daily charts. Price action has stayed resiliently above the 260 day EMA since September 2010.

There are 2 clear medium/long term support and resistance lines at 4200 and 4800 respectively. The previous 5000 high has not been touched since the May flash crash of 2010. What will it take to see a new bullish leg - what should we look for?

For a sustained, medium term trend, I look for the following:

a confirmed break out above the historical resistance level - in this case 4800 points.
all price action above the 260 and 63 day EMA's, with a rising 63 day EMA
quarterly momentum rising above 5% signal line (and preferably own EMA)
quarterly Positive DMI, after a recent crossover, rises above its higher signal line

The chart opposite shows quarterly momentum, obviously increasing from September lows. Although it has breached the 5% signal line, it has done this before, at both 4800 resistance points. The DMI chart shows a similar tendency to approach its upper signal line, but fail on retracement. This is the major concern, even though price action would suggest a new medium term trend is possible. The daily chart opposite shows the very large bullish candle on Thursday (which happened when your blogger was riding his motorcycle to Perth to get it serviced, and his laptop failed. Damn you Toshiba cr&ppy netbook! At least the coffee in the customer's lounge was good quality...) Using just price action analysis, opportunities abound for selling spreads under the recent moves, given the strong levels of support both short- and medium-term. Until confirmation of new trend, the main signal being subsequent weekly closes above 4800 points, and quarterly momentum EMA above the 5% signal line - I would suggest the following:

XJO short term trade: Feb 4700/4650 Bull Put Spread, looking to scale into additional contracts and/or new Feb 4750/4700 as XJO improves.
XJO medium term trade: Mar 4600/4500 Bull Put Spread and April (when released)

Banks (CBA, MQG, WBC) CBA and WBC still remain in structural sideways bearish stances, Westpac more so, especially with regard to falling volume.

WBC falling volume....

On raw price action, the Commonwealth Bank may be forming a cup-and-handle pattern, approaching local resistance at $51.50, with short term support at the psychological key level of $50 (who knows why - people like big round numbers?) and medium term support at $47.50. In the short term, CBA is in a quick upward move, with short-term momentum about to cross its "long" signal line. Again, perhaps the enticement of a very large dividend yield and a "safe" bank (sic) is encouraging new investors - but like WBC, volume doesn't support that thesis. Watch for confirmation of short term uptrend in the coming week, with possible long strategies (e.g $51 Feb call or ATM warrant).

CBA short term trade: Feb $49.50/49 Bull Put Spread

Westpac has finished its small correction and may be in a small upward move according to short term price action (2 strong closes above short term moving average and 15 EMA, with long tail/Doji cross candle finding support at $22), but all 3 secondary indicators do not confirm an uptrend (see chart below)

Watch for confirmation of short term uptrend in the coming week, with short term bull put spreads ($21.50 or $22 upper strike prices).

WBC medium term trade: Mar $21/20 Bull Put Spread

Macquarie has a different structural stance to the "Four Pillar" banks.

from Chartpattern.com

After a very long correction since the May flash crash of 2010 and bottoming in October, it has roared back, displaying a very common pattern - the flat base and has subsequently broken out in a FAST short term uptrend. I'll expand on Macquarie's recent price action and how to spot and use this pattern (see right) in a separate post. MQG has changed its cycle from sideways bearish to bullish, with long term cyclical indicator not yet confirmed by quarterly momentum, but a crossover of the DMI and a weekly close above the 260 day EMA is bullish.
In the short term, MQG is in a short/medium term uptrend, approaching the $40 resistance level (created by the indecision in June-Aug 2010). Secondary indicators suggest continued strength, although the first stage KC Signal (too fast) has been triggered, with possible retracement in days ahead. Given the structural change in MQG's stance, retracements allow for re-entry into a continued breakout (or a lower point of risk in case of bearish change) MQG short term trade: possible Feb $39 or $39.50 long call, Feb $37.50/$37 Bull Put Spread

MQG medium term trade: Mar or Apr $35/$34 Bull Put Spread

Miners (BHP, RIO)

As predicted in last week's analysis, BHP continues its sideways bullish stance, with slowing momentum. Price activity still remains above the once $45 resistance, now support level.
Quarterly PDI on the DMI is falling, but quarterly momentum remains above its own EMA and lower signal line. In the short term, BHP is moving around within its continued medium term trend. Failure to close above the previous $46.50 level in the coming week would suggest a good time to take profits. BHP is profiting handsomely from the ridiculous QE2 inflation coming out of the NY Federal Reserve. Watch for volatility in commodity prices (coal, iron ore, gold, crude oil, copper and nickel) in the coming weeks, but QE2 is going to last until March or even June at this stage. Further, the possibility of very large share buybacks by "the big Australian" will likely keep BHP elevated for some time.
BHP short term trade: take profits on any long trades if price fails to close above $46.50 target next week

BHP medium term trade: March or April $42/41 Bull Put Spread

RIO has effectively been a sideways bullish stance since early November 2010, although the pattern does resemble a strong bull flat base (see MQG above).

It's struggling to move past resistance at $87.50, but bounces off support at $82. This simple price action suggests use of OTM strangles (e.g $90/$80), but of course, the trader needs to be careful that factors out of his control (e.g QE2 as mentioned above leading to commodity prices bubbles) could cause RIO to jump to $120 or crash to $60 in short time!

Momentum (top) not confirmed

At this stage, I would want to keep a close eye on the short term price action, particularly breakouts above $88 or so. RIO could move swiftly up from this level. Recent price action indicates a new short term trend, confirmed by cyclical and directional indicator, although momentum is yet to cross the signal line. (see chart above)
RIO short term trade: Feb $84/83 Bull Put Spread on confirmation (short term momentum)

RIO medium term trade: possible long ATM call for short/medium term breakout from flat base

Woolworths (WOW) Last but not least Woolies. In a recent post on WOW, my analysis suggested that it remains in a solid sideways bullish price action, unless a definitive up-move in the 260 EMA plus a quarterly change in momentum and direction suggest a new medium uptrend. Since that post, JPMorgan has upgraded WOW to a buy, with a price target of $30. Normally (always actually) I never listen to mainstream brokers for investment advice (don't be surprised if JPMorgan starts selling their "go-nowhere" WOW shares on market in the next few months), but what's important is not the news, but the reaction to the news.
WOW is now on a tear, its "End of Correction" confirmed and then upgraded to "Short Term Uptrend", although Friday's extremely strong bullish candle may mean a small retracement in the coming days. This action is supported by a strong buildup of volume since early January.
As mentioned in my post on WOW, watch for a sustained move on the PDI on the DMS above 30, support on the quarterly momentum and directional indicators to confirm that medium trend, and then hold on!!

WOW short term trade: Feb $27.50 long ATM call on confirmed medium term trend and/or Feb/Mar $26.50/26 Bull Put Spread

WOW medium term trade: Mar or April $26/25 Bull Put Spread or $26 Cash-secured Put

Economic Outlook in "Stick Figures"

2011-01-16T05:00:00.001+08:00

A great set of explanations, linked from Mish's blog from Cravens Brothers in the US.

It reminds me of this video of Sir Ken Robinson's explanation of the failure of current education systems.

Although somewhat US-centric - well, why wouldn't it be, since they are 25% of the world economy and their fate is tied to the next 3 largest economies (China, Japan and the EU), it is a clear explanation of how we got here and where we might be going, without resorting to economic mumbo-jumbo or political debate.

A PDF (about 1.4Mb) is available here or in flash-style format here.

More screenshots:

Blog Schedule

2011-01-15T14:32:00.002+08:00

Let's get down to brass tacks.

The purpose of this blog is to:

observe a short and medium term trader make his living
examine, evaluate and track trades and opportunities
analyze strategies and previous trading examples
learn about technical analysis, charting and macro-market analysis
hopefully, get excited about how a retail-level trader can compete against the institutions that move the market, and the macro factors that are out of everyone's control!

To that end, I'm going to follow this schedule when posting on Birch Creek Trading:

End of Week Market Analysis, including an overview of the Magnificent Seven
End of Month Trading evaluation
Post-trade analysis of each completed trade (usually that week)

Intermittently, I will post on such topics as:

Trading System development (I have dozens of different systems I've tested and used!)
Once or more a week analysis of the best ASX100 and/or ASX300 opportunities
Individual stock analysis - please send me your ideas!
Self-Managed Super Fund trading strategies
Using CFD's
A.B.C Trading (asymmetric/black swan/contrarian)
Risk and Money Management techniques for different traders and systems
Personal Psychology - what does it take to be a trader?
Trading or Investing - is there a difference? What's the point? Can I do both?
.....and lots more

I hope I can encourage and enlighten those readers who are considering or are actively trading the Australian stock market (or other markets and securities).

I welcome comments and suggestions and will endeavour to respond as quickly as possible.

Followup to ASX100 watchlist

2011-01-15T13:59:00.004+08:00

On Monday, 10th of January I posted about some ASX100 stocks that came up on my radar as possible trades.

With a full week of trading over, let's see how they went (italics is original Monday suggestion)

Caltex (CTX) Possible reversal on oil price. down 76c or 5.1% - due to flooding impact on profit, not my analysis!
Coca Cola Amatil (CCL) Possible too quick.... indicating a probable retracement - 4 straight days of sideways action. KC Signal** worked here...
Cochlear (COH) Medium term support at $76 to re-enter trend - rebounded off medium support for new short term uptrend, up 4.6%
Computershare (CPU) Sideways bullish at the moment. Watch for breakouts - broke out of trading range for 3.7% return
CSL - Good possibility here for a quick short - no support opportunity, but remains Sideways Bearish, but support at $36
CSR - Long candles indicate lots of intra-day opportunities -closed at same level as Monday, with many intra-day trades in between. Sideways Bullish continues.
David Jones (DJS) Possible short and medium term trend could develop here. Support at $4.40. Up 2.6% on new uptrend, although resistance met (long shadows on recent daily candles) at $4.75-$4.78.
Harvey Norman (HVN) No sign of imminent upside breakout. Well I got that wrong - 4.8% uptrend, probably due to new upcoming sales of white goods for flood replacements.
Incitec Pivot (IPL) all medium term indicators suggest continued strength. A small retracement on Tuesday, but ended up for the week. Still good trend.
JB Hi-Fi (JBH) Could be a good upside move - wait for confirmation - confirmation on Tuesday, great new move 5.1% for the week and probably rising.
Leighton (LEI) new short term uptrend in place with reversal of price action - correct, but somewhat weak with not very impressive volume force
Macarthur Coal (MCC) showing signs of a strong breakout - trend continued, but still barely closed above Monday close - as I said, better opportunities were available.
Mirvac Group (MGR) One to watch for continued signs of strength - new short term uptrend, 3.1% return. Likely to continue, but sideways for awhile.
Myer (MYR) similar action to JBH and DJS. Limited upside - only closed 4c (or 1.5%) up on Monday. Weak trend at the moment.
Paladin (PDN) possible upside move in the coming days or next week - breakout on the Wednesday, closed 7.5% up for the week.
Primary Healthcare (PRY) not sustainable in the short term, possible entry on retracement for the hardened souls - correct, price went nowhere all week.
Qantas (QAN) signals a reversal for the flying kangaroo. Need further confirmation to enter a trade - no further confirmation - long shadows indicate confused market.
Telstra (TLS) Low volatility means selling options or spreads is not very profitable. But it also means cheap directional plays - small uptrend from a breakout. The Jan 2.70 in-the-money (ITM) Call Option (TLSD68) could have been bought for 9.5c on Monday, and traded at 17c today. Classic ABC Trade**.
WorleyParsons (WOR) small uptrend underway, closing above local resistance at $27.50 - correct: 2.4% small uptrend for the week.

Results
Out of 19 forecasts, I'll ignore CTX as being "correct" (I thought on oil price - which went up, not the flood damage to refineries), I'll separate the results as such:

Correct call - 8 (CPU, CSR, DJS, IPL, LEI, MYR, PRY, WOR)
Wrong call - 1 (HVN)
Possible call, confirmed - 7 (CCL, COH, JBH, MCC, MGR, PDN, TLS)
Possible call, not confirmed - 2 (CSL, QAN)

Not bad for an afternoon's analysis.

Remember, its not the win/loss ratio (i.e how many you get right or wrong), but the profit/loss ratio. You can have 9 losers and 1 winner and come out by a mile, with proper capital and risk management.

Sidenote 1- a KC Signal is something I've discovered that measures a "too-fast" daily price move. Analysis of daily candlesticks thereafter will confirm or ignore the signal's intent.

Sidenote 2 - an ABC Trade stands for "Asymmetric, Black Swan, Contrarian". Effectively, going against the grain - or the unexpected - for an excellent payoff (e.g 200%) but probably very low or zero chance of success.

WOW - Woolworths continues to surf sideways...

2011-01-13T17:41:00.002+08:00

This will be a chart-heavy post, apologies in advance. I've kept the charts simple, and you may notice some indicators are turned off (upper left corner). I actually do this myself as I prefer to look at the price action as raw as possible and not get blinded by a mish mash of squiggly lines.

Behaviour
First, let's look at the medium term nature of WOW, using a 3 year period and weekly close on a line chart. I've added the 260 day exponential moving average (EMA). I find this is a better market indicator than the common 200 day average from my research on decades-plus time series of overall market moves.

What is evident immediately is the downtrend since the GFC of late 2008/early 2009 and subsequently, the lack of a trend in the past year. Using the 260 EMA as a fundamental guide to wash out the intra-weekly trading noise, there has been a slight improvement in value since mid-2009, but overall price action is frustratingly sideways!

Next, let's look in the relative short term at weekly and daily price data over the last 12-18 months:

This chart is the daily close with a 15 day EMA. Price action is all over the place, with large reversals, head and shoulder patterns (a minor one in May to June 2009, a larger pattern in Sept to Nov 2010) and much randomness and noise.

Note how on the medium trends (March-April 2010 and August-October 2010), price action seems to respect the 15EMA. A possible entry signal is generated when price closes above the 15EMA - this signal should be reinforced by performing such an entry at the lowest risk point - at the end of a correction! Further analysis shows that such a system, without causing whipsaw entries and exits, requires secondary confirmation.

This chart shows the momentum oscillator I like to use to pick short term trends - the 2% signal line and momentum above its own smoothed average is the secondary confirmation I like to see for a short term uptrend, and above 5% for a medium term uptrend (or fast short term). The middle price movement broached 2% and gave a positive signal, although ultimately only small gains were made.

Here's a closer look at the recent medium term uptrend from August to October 2010.

Notice how most, if not all of the intra-day price action stays above the 15 EMA? I've included the Directional Movement System I use for trending price action. I use two signal lines that act as triggers for strong moves (the upper confirms a new trend, the lower the end of a trend)

Notice how the initial short term trend starts with a close above the 15 EMA in early August confirmed by a crossover of the positive (blue) and negative (red) trend indicators. This then becomes a medium term trend price action confirmed as the positive DMI crosses above the 30 signal line, and like how price action respects the 15 EMA, it stays above the 30 line for all of the medium trend.

These are strong signals and help you ride a short and medium term trend (and know when to get off). But this has been the exception with WOW, with only 3 such trends in over 18 months, and the somewhat equivalent in corrections.

So how do you trade what is predominantly a sideways stock?

Sideways to Heaven
I mostly trade sideways action, since the probability is more in my favour of a successful trade. Paradoxically, I make most of my money on the directional trades. This is the non-linear nature of trading full time!

Trading sideways or directionless markets and stocks does require the use of different trading vehicles. The best, in my opinion, are Exchange Traded Options (ETO). If you are unfamiliar with options, Google it or go to Wikipedia or ASX Online Courses.

My research and field testing (including one spectacular failure) has proved to me that selling naked options, in almost all circumstances, is not a long term profitable endeavour.

A variation on the theme is selling option spreads, namely credit spreads. I use both Bull Put Spreads (selling a naked put but buying a lower strike put for protection) and Bear Call Spreads (selling naked calls but buying a higher strike call for protection). These vehicles have much less risk and capital requirements than covered call writing or naked selling. I know my maximum risk (loss) up front and can allocate my capital correctly.

How does this work with something like WOW?

Let's go back to the second chart, with a few modifications:

I've used the 260 EMA again as an illustration of the general price move. The small orange lines represent possible 1 or 2 month to expiry credit spreads, whilst the darker longer lines are possible 3-6 month long credit spreads.

How do I set up the shorter term spreads? Basically by looking for "End of Correction", "End of Trend" or "Short Term Uptrend" price actions. Notice how the "new" credit spread starts above a new high, or below a new low. I'm looking for these price actions because they provide the lowest risk trade.

This brings me to Defensive Actions. What can happen after you set up say a Bull Put Spread, after the end of a correction?

The price goes sideways for awhile, never really going down much more (a few % at most)
The price goes up for a bit, but then runs out of puff after a few days of so-called "profit taking".
The price goes up and starts a new trend.
The price goes sideways, then a new wave of selling hits and the correction continues.

Out of those 4 probable actions, which of the above are profitable when you sell a Bull Put Spread?

Answer: the first 3. Why? Mainly because of time, or delta decay. I won't go into the "Greeks" of option trading, but the major one to be wary of is time decay. Here is the central concept of selling spreads:

You are not trading direction, you are trading time.

You are not looking for a directional target - you are looking for price to be above a certain point, for a certain length of time. Therefore, you need to trade with the balance of probabilities. Which is why I've gone the roundabout way of explaining Defensive Actions and why your entry point should be at or near "End of Correction", "End of Trend" or "Short Term Uptrend" price actions, not in-place directional trends (besides, option premiums tend to be very low in well-trending stocks).

My Defensive Actions are simple:

If price goes sideways, I hold the position and wait as my position increases in profits
If price goes up a bit, then sideways, I hold the position and wait as my position increases in profits
If price goes up and starts a new trend, I'll usually add to the position (either the same position, or a higher strike, or a longer expiry or a combination thereof, and sell to close my original long option (to recover some premium)
If price goes down, I'll cover my sold option for a loss and hold my long option and consider a new trade (e.g selling a Bear Credit Spread above the recent price action)

What timeframe?
There are two considerations here, one is to get a regular income by selling credit spreads underneath the short term prevailing move. The other is to sell longer term spreads for less risk (and brokerage) but smaller annualised return on capital.

The former strategy involves a lot of analysis and taking of risk, but in the end will almost always be more profitable than buy and hold (hope) or trying to trade the infrequent short and medium term trends. I need regular income so I use 1-2 month credit spreads as my main source of income. The longer dated spreads work well for adding income to your overall portfolio whilst waiting for capital gains.

There is no reason to say you can't combine all three strategies. In fact, I do so in my Self Managed Super Fund (SMSF), using a cash-secured put twist. More on that one later....

Conclusion
I've shown a method of trading a sideways stock, through thorough analysis of short and medium term price analysis and using a different trading vehicle to the traditional long share.

There are other strategies you can use. Strangles or Iron condors, or a calendar spread. I find credit spreads easier to understand and implement, as they keep me on my toes in readiness for the big earners - the directional trades.

As for WOW, until we see a definite up-move in the 260 EMA, plus a secondary confirmation via quarterly change in momentum and direction, WOW remains in a solid "SIDEWAYS BULLISH" price action.

This means for medium term traders and investors, the best trade is a 3-6 month dated Bull Put Spread (or a cash secured naked put for those of you wanting to acquire WOW). I would consider $26 to be the best upper strike (or naked level) for such a trade, as support here is very strong.

Opportunities abound for sideways trading in this environment.

Speech on Risk - put on your desktop!

2011-01-12T12:38:00.001+08:00

From a brilliant speech by Charles Sanford:

From an early age, we are all conditioned by our families, our schools, and virtually every other shaping force in our society to avoid risk. To take risks is inadvisable; to play it safe is the counsel we are accustomed both to receiving and to passing on. In the conventional wisdom, risk is asymmetrical:

It has only one side, the bad side.

In my experience -- and all I presume to offer you today is the observations drawn on my own experience, which is hardly the wisdom of the ages -- in my experience, this conventional view of risk is shortsighted and often simply mistaken.

My first observation is that successful people understand that risk, properly conceived, is often highly productive rather than something to avoid. They appreciate that risk is an advantage to be used rather than a pitfall to be skirted. Such people understand that taking calculated risks is quite different from being rash.

This view of risk is not only unorthodox, it is paradoxical -- the first of several paradoxes that I'm going to present to you today. This one might be encapsulated as follows: Playing it safe is dangerous. Far more often than you would realize, the real risk in life turns out to be the refusal to take a risk. In other words, the truly most threatening dangers usually arise when you shrink from confronting what only appear to be the most threatening dangers. What is widely regarded as playing it safe turns out not to be safe at all.

What I'm offering here is not a surefire, guaranteed formula for success. No such formula exists. It never will. If anyone ever tries to sell you one, keep your money in your pocket. For life, above all else, is a risk. I'm not trying to dispel that risk with a bottle of Charlie Sanford's Magic Elixir. I can only arm you with a little food for thought. I do have a few suggestions. You may not wish to follow them. But if you'll think about them, I'll consider our time together most productively spent.

We all know that modern civilization owes much to the ancient Greeks. As the 20th century draws to a close, it's difficult to single out a Greek thinker who speaks more directly to us than Heraclitus. All is flux, nothing stays still, said Heraclitus some 2,500 years ago. Nothing endures but change.

Most of us have come to believe that nothing endures but change, but its consequences still deserve some reflection. Obviously, if change is the fundamental rule of life, then resistance to change is folly -- doomed to defeat. Just as obviously, if change is our constant, then uncertainty is an inescapable part of our lives. Uncertainty is unavoidable. Life is unpredictable. The very essence of life is the unexpected and the unintended, the unanticipated turns that we may metaphorically ascribe to Fate or Destiny or Providence.

Therefore, unless we wish to be tossed about like so much flotsam on the waves of inescapable change, we must place ourselves squarely in the midst of change. We must learn to ride the current of change rather than to swim against it -- although people who haven't taken the trouble to learn how the world really works will think we're doing exactly the opposite.

In other words, risk is commonly thought of as going against the current, taking the hard way against high odds. In a world of constant change, however, a world where Heraclitus said we can never step into the same river twice, taking risks is accepting the flow of change and aligning ourselves with it. Remember the first paradox: Risk only looks like reckless endangerment. For those who understand reality, risk is actually the safest way to cope with a changing, uncertain world.

To take a risk is indeed to plunge into circumstances we cannot absolutely control. But the fact is that the only circumstances in this life that we can absolutely control are so relatively few and so utterly trivial as hardly to be worth the effort. Besides, the absence of absolute control -- which is impossible in any case -- does not entail the absence of any control, or even significant control.

There, again, is the paradox: In a world of constant change, risk is actually a form of safety, because it accepts that world for what it is. Conventional safety is where the danger really lies, because it denies and resists the world.

I trust you understand that when I say risk is actually safety, I'm talking about a certain sort of risk. I'm not advising that you leap off tall buildings in the hope that the operation of constant change will reverse the law of gravity in mid-flight. I'm speaking rather of a sort of risk that actually aligns you with the direction of change.”“To be more specific, I believe firmly that the sort of risks that put one in a position to control one's lot in a world of incessant change are the risks that attempt to add something of value to that world. To create value, to focus one's efforts on increasing the fund of that which is worthwhile, involves (as we shall see) a sort of risk. And yet, paradoxically, it provides you with the greatest control over a changing world and maximizes your chances to achieve a truly meaningful personal satisfaction.

Some ASX100 stocks to watch

2011-01-10T21:56:00.003+08:00

I don't normally trade these, but a quick review has shown some opportunities in the ASX100:

Caltex (CTX) reaching a new high $15. Possible reversal on oil price. Can be volatile stock!
Coca Cola Amatil (CCL) strong reversal from an earnings-led correction. Possible too quick with a KC Signal indicating a probably retracement (as the first longs make a profit to the gullible second longs)
Cochlear (COH) small correction from recent high. Watch for close below $78 or so for full correction. Medium term support at $76 to re-enter trend
Computershare (CPU) flattened off after good uptrend. Sideways bullish at the moment. Watch for breakouts.
CSL - flattened off after stage 1 and 2 uptrends, now with possible correction? Good possibility here for a quick short.
CSR - very fast short term uptrend with near parabolic breakout in last 2 days. Long candles indicate lots of intra-day opportunities. One for the strong-at-heart crowd.
David Jones (DJS) - strong bullish daily candle breakout after retail spending results. Possible short and medium term trend could develop here, given a long correction ($5.20 to $4.30) since September. Support at $4.40
Harvey Norman (HVN) - has found a bottom after a disastrous anti-customer campaign. No sign of imminent upside breakout. Not the best retailer to be buying at this stage.
Incitec Pivot (IPL) - has recently broken out of sideways bullish move. Moving averages are stacking however, a somewhat unreliable signal that the trend may be over, as all medium term indicators suggest continued strength.
JB Hi-Fi (JBH) - similar single day bullish candle to DJS on news of retail spending results. Much better retailer than HVN that has suffered a 20% correction. Could be a good upside move - wait for confirmation (I might actually do this one......)
Leighton (LEI) - classic end of correction, new short term uptrend in place with reversal of price action. Approx. 20-30% off highs - a lot of value investors might be buying here...
Macarthur Coal (MCC) - I don't like trading pure commodity players, but MCC is showing signs of a strong breakout. One to watch (but better candidates to play with)
Mirvac Group (MGR) bullish engulfing candle on Mirvac - but only single day action. One to watch for continued signs of strength.
Myer (MYR) similar action to JBH and DJS. Limited upside however, not a smooth stock to trade.
Paladin (PDN) the uranium miner is in a bullish sideways holding pattern with a possible upside move in the coming days or next week.
Primary Healthcare (PRY) in a near parabolic uptrend - not sustainable in the short term, possible entry on retracement for the hardened souls. Bad company if you ask me....
Qantas (QAN) yowsers! very strong single day bullish candle signals a reversal for the flying kangaroo. Need further confirmation to enter a trade. Great bull put spread opportunity!
Telstra (TLS) very neutral sideways pattern since early December. Low volatility means selling options or spreads is not very profitable. But it also means cheap directional plays. Not a favourite of mine, crap company and too exposed to government shenanigans.
WorleyParsons (WOR) small uptrend underway, closing above local resistance at $27.50. Is WOR overbought? Still well off its 3 year highs, indeed has some upside to its 2009 high.

There you have it - a couple of ideas and ones to watch. I use the same systems for my "Seven" to analyse the above.
XJO (ASX200) is appearing to slow down its correction and intra-day data supports a near-close rally.

News of the devastating floods in QLD may put a damper on the markets tomorrow, as does the current efforts in Europe, with all major indices down 1% or more at the time of writing.

About Birch Creek

2011-01-10T20:49:00.002+08:00

About Me

After a successful career as a portfolio manager and financial planner, I've been a full-time trader for almost two years. I also am a partner in a private value investing business, Empire Investing, that concentrates on Australian listed companies as long-term investments.

Birch Creek is an anagram of my name and serves for internet anonymity (more or less).

Purpose of this Blog

The purpose of this blog is to:

observe a short and medium term trader make his living
examine, evaluate and track trades and opportunities
analyze strategies and previous trading examples
learn about technical analysis, charting and macro-market analysis
hopefully, get excited about how a retail-level trader can compete against the institutions that move the market, and the macro factors that are out of everyone's control!

Blog Schedule

To that end, I'm going to follow this schedule when posting on Birch Creek Trading:

End of Week Market Analysis, including an overview of the Magnificent Seven
End of Month Trading evaluation
Post-trade analysis of each completed trade (usually that week)

Other Topics

Intermittently, I will post on such topics as:

Trading System development (I have dozens of different systems I've tested and used!)
Once or more a week analysis of the best ASX100 and/or ASX300 opportunities
Individual stock analysis - please send me your ideas!
Self-Managed Super Fund trading strategies
Using CFD's
A.B.C Trading (asymmetric/black swan/contrarian)
Risk and Money Management techniques for different traders and systems
Personal Psychology - what does it take to be a trader?
Trading or Investing - is there a difference? What's the point? Can I do both?
.....and lots more

I hope I can encourage and enlighten those readers who are considering or are actively trading the Australian stock market (or other markets and securities).

I welcome comments and suggestions and will endeavour to respond as quickly as possible.

End of Week Market Analysis - 8th January 2011

2011-01-10T16:30:00.002+08:00

The Market
The ASX200 (XJO) is still in a sideways bullish holding pattern. The trend line, from a low at 4182 on 6 July 2010 through to the accumulation zone in late November, early December 2010 has been respected after a small, weak correction since the start of 2011.

There is very firm resistance at 4800 points, and similar strength of support at (intra-day) 4550 and (closing) 4600.

Secondary indicators suggest continued weakness to the upside, with nothing confirming or suggesting a sustained upward trend - past 4800 - at this time.
However, recent price action in the last week, which is somewhat oversold, suggests a possible short-term trend, with a target of 4800 points (resistance).
The XJO remains cyclical at best, a medium term strangle (4850+/4500-) or OTM Bear Put Spread appear to be the best trading opportunities at this time.

Banks
CBA and WBC have remained in a structural Sideways Bearish pattern since May 2010. This is endemic of the so-called "Big Four" banks.

CBA weekly price since May 2010

CBA has recently undergone a short term correction which appears to be running out of puff at just below $50 per share, although the Negative DI on the Directional Movement has not confirmed the end of the downward move, staying above its signal line.
Although CBA remains in an overall bearish position, both in the short and medium term, support may be gathering coming up to earnings season. It has a net dividend yield of 6.1%.
Suggested trade: stand aside until "End of Correction" or "Short Term Uptrend" price action is confirmed. Possible medium term OTM Bear Put Spread at $52-$53 area.

WBC finding support?

WBC's price action is very similar although its correction (from a high of $23.20 to almost $22) has been longer than CBA with a pause at $22.60/70 area, before finding support at $22.
And similarly, WBC is still bearish in both timeframes, with Negative DI still well above its signal line and negative momentum still in place. There has been no short trend cyclical change with WBC yet.
Suggested trade: as above, stand aside until price action is identified and confirmed.

Miners
BHP is driving this market with a medium term trend from late August, 2010 still in place, with a support trendline in the $44.50 area. Momentum is slowing down, and the main cycle is indicating a possible correction or sideways action in the weeks ahead.

BHP still rising?

In the short term, BHP has had a mild correction after hitting a near Xmas high of $46.48. The current price activity could be somewhat oversold, particularly if BHP respects its medium term EMA and weekly trendline.
Suggested trade: "End of Correction" on confirmation: $44 or $44.40 upper strike Bull Put Spread

RIO is also driving alongside BHP having risen almost a third since its $65 low in July 2010. It has gone sideways since reaching a frothy $88 high in mid-November 2010 with two subsequent corrections and a small and short uptrend. Resistance at $88 appears to have set in the mind of the market.
In the current correction/sideways bear move, RIO is approaching its medium term EMA (approx. $84). A close below this level would suggest a large down move, but all secondary indicators are oversold.
Suggested trade: "End of Correction" on confirmation: $84 upper strike Bull Put Spread

Woolworths (WOW)
WOW is consolidating in its nearly 3 year old trading channel after reaching a high of $30 on October 7, 2010. Price bounced off the new higher support level of $26 after the October correction and has returned there again after a lacklustre Xmas trading period.

In the short term, expect WOW to bounce off the $26 support for a "End of Correction" price action, but with continued sideways weakness.
Suggested trade (if confirmed by secondary indicators): Bull Put Spread at $26 upper strike

All chart image screenshots from Incredible Charts.

Why the "Magnificent Seven"?

2011-01-10T13:58:00.001+08:00

The trading world is immense. For anyone starting out the choice is unbelievable, not only in terms of securities but markets:

foreign exchange (FX)
commodities
stocks
bonds
precious metals...etc

And then the trading vehicles: shares, warrants, options, CFD's, futures, swaps.....

So why did I choose the "Seven"?

First of all: liquidity and slippage. I am a retail-level trader, without a trading desk or institution behind me. I must move like a leaf on the wind in and out of positions. There are plenty of mining/small-cap stocks on the ASX with plenty of price opportunities. However, liquidity and slippage cannot be measured beforehand, nor can it be relied upon. Trying to close out or fill your trade in a rising or falling market is very frustrating.

The "Seven" have ample liquidity with millions of shares trading each day. Slippage is usually not much of concern here either, except when dealing with Exchange Traded Options (ETO's).

Next, trade-ability. With the "Seven" I can trade shares, warrants, options and CFD's so I can tailor the exact vehicle and strategy I want given the prevailing market condition. There are only 30 or so stocks on the ASX (2200 stocks) that meet these conditions.

Options: the ASX option market is not very deep, nor broad. The XJO index option is the most widely traded, followed by the remainder of the "Seven". Although certain option strategies sound good on paper or at highly spruiked seminars (e.g covered calls - although there is a place for them), getting filled and finding appropriate premium and the right risk-reward ratio is another thing entirely.

Finally: focus! Having "only" 7 things to watch day in day out you to focus your efforts by limiting and concentrating analysis on that group. The downside is possible missed opportunities in other areas/markets, although this is mitigated somewhat by the fact that the "Seven" comprise most of the market move!

Will I consider others?

Yes - I have 3 other securities on my watchlist to make a round perfect "10": QBE Insurance (QBE), ANZ Bank (ANZ) and National Australia Bank (NAB). At this stage I effectively paper-trade them.

There are others as well that I look at from time to time, including some international listings included in my "Crash List".
These include gold (in USD), the S&P500 Index/DJIA (i.e Wall Street), the FTSE100 and the AUD/USD FX pair. I will occasionally trade these (mainly via CFD's) and publish my results.

So what are your "Magnificent Seven (or more...or less)" and why?