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How To Make A Full-Time Income Trading Less Than Part Time

Big Dogs Exposed

Sound familiar? You have spent years surfing the 'Net, and studying books and charts in search of commodity trading rules, a currency trading strategy, stock market successful trading strategies, or information on how to use commitments of traders data. All you really want is the 'Holy Grail' of entry techniques. You usually end up adding one indicator on top of another, switching from one guru to the next, until you are so confused and unsure of your entry system that you are unable to make entry decisions and stay organized. You get so distracted and frustrated that you quit watching the markets all together!

Shows you how FAST you can make money when the BIG DOGS make their move - by shamelessly copying this winning group . Even I am STILL surprised by how much power they have over ALL markets - not just commodities futures, currencies, and stocks.G

Newsletter - August 2003

This is an exact copy of the Newsletter e-mail-out.

Greetings! You are receiving this Newsletter because you either subscribed to it at my site, or bought one of my products. It is e-mailed only to those participants who opted in voluntarily, and is not sent to unwilling partners. Your e-mail address will never be shared with a third party under any circumstances. You are safe with me. I don’t condone spam, nor do I promote it. And, that’s a promise from me to you. You have my personal word on it.

This Newsletter is issued on an if-as-and-when basis – at least once a quarter, but not more often than once a month.

This Newsletter is dedicated to traders around the world who are interested in trading commodities futures, currencies (FX and futures), markets and/or stocks. Obviously, I can’t cover all four bases in any one single edition of this Newsletter due to space limitations, and also out of respect for your time.

Please don’t click away or delete too soon, or you’ll miss my commodity trading rules, currency trading strategy, and stock market successful trading strategies coming up shortly. Also, you will find my commodity, currency and stock picks of the month later on in this Newsletter.

You should view this Newsletter while you are connected to the Internet, so that you can see the imbedded charts and graphics. It may take a while for the charts to load, if you have a slow connection; so, don’t panic.

The work I do is part mission ... part profit ... and part emotional release … in no particular order of importance.

It gives me a chance to rank ’n rave about the lies and half-truths that are sometimes touted as wisdom on Wall Street. You get a chance to look into the investing and trading minds of the “big dogs” in this business – the heavy hitters who have easy access to the true shakers and movers of those worlds.

I write because I enjoy it, and because I believe people like you deserve an unbiased and untainted view of what’s really driving the markets.

Other Editions

Commodity Trading Rules

Currency Trading Strategy

Stock Market Investing Basics

Stock Market Successful Trading Strategies

For those of you who missed other issues of this Newsletter, you can read them online by going to: Other Issues

Those issues deal primarily with commodity trading rules, a currency trading strategy, stock market investing basics, and stock market successful trading strategies.

If your trading is all foam and no beer, then be sure to read my Newsletter on a regular basis. And, please send me suggestions for things you want to hear about.

Chart Patterns

These patterns are offered in support of my currency trading strategy but they are equally applicable to all markets.

Currency Trading Strategy: Hammer/Spinning Top

Price opens and closes toward the middle of the price range, forming a bar known as a “Spinning Top.” Such hesitation often portends a change in price trend, and indeed price reversed, as you can see in the chart below.

This particular candlestick (also called “candle”) is called a “doji” (pronounced doh-jee), and is a session where the open and closing are the same. Although the Spinning Top bar formation has the open and close situated toward the middle of the bar, other doji bar formations can have the open and close anywhere along the bar, so long as the open and close are the same.

You will also notice a bearish “Hammer” candle signal to the immediate left of the Spinning Top. As shown below, this is a candle line with a small real body (either black or white – or colored with online charting services) at the bottom end of the trading range, and a bearish long upper shadow.

Both candlestick formations occurring back-to-back left price with nowhere to go but down. Very powerful stuff. So, keep your eyes open. A lot of people have trouble with their trading decisions, but here the choice is crystal clear. You could trade just spinning tops and hammers, if you wish – if you are just looking for sheer simplicity with your trading.

The “real body” is the rectangular portion of the candle line, and it represents the range between the opening and closing prices. A “blue” real body tells us that the close is higher than the open, since the top of the blue real body is the session’s close, and the bottom of the blue real body is that session’s open. A “red” real body relays the fact that the close was lower than the open. The bottom of the red real body is the session's close, while the top of the red real body is that session’s open. The session can be any time frame, from a one-minute to a monthly. In some charting services, a blue real body is white, and a red real body is black.

The vertical lines that extend above and below the real body are called the upper and lower shadows. The top of the upper shadow is the session’s high, while the bottom of the lower shadow is the session’s low.

Candlesticks can be used in all time frames, and for all tradables – not just currencies.

(Price chart courtesy CBFX.com)

(Above two charts on candlestick patterns courtesy Steve Nison)

These are just two of the many useful insights to trading you will find at: commodity trading rules, currency trading strategy, stock market investing basics, and stock market successful trading strategies

Rougeaphobia?

“Rougeaphobia?” is the fear of opening your portfolio statements for fear of seeing them awash in red ink – after three years of NASWRECK. Fire your investment advisor, and do it yourself (DIY).

The parameters for a balanced portfolio are 50 per cent in equities and 50 per cent in bonds and fixed income. If you have a need for more speed, add five or 10 per cent to the more aggressive side, but leave the remainder of the 90 per cent in the 50/50 profile. While you’re at it, the traditional insurance allocation of 5 or 10% to gold would be reasonable thing to do.

Depending upon your age, the percentage you should have in fixed income could be: 30 = 30/70, 50 = 50/50, etc.

You should have a risk-management strategy in place to protect your portfolio. Say, for instance, you’re down 20 or 25 per cent. Sell at least half your position. And, sell the rest of your position, if it falls another five or 10 per cent.

On the way up, lock in gains, moving them to secure or undervalued instruments.

If you start out 50/50, stocks start going up, and you’re 60-40 in stocks, take something off the table, and put it into the other stuff that isn’t doing as well.

As stocks turn down, the bond side will go up. That’s how to minimize the damage.

Unlike with cars (BMWs costing more, and being better than Chevrolets), the same cannot be said of mutual funds. The more they cost (management expense ratio or MER, that is), the worse they are. Morningstar found that for 22 of 23 asset classes, cheaper funds generally outperformed the more expensive funds – with the exception of technology funds.

Wall Street doesn’t want you to know that actively-managed mutual funds seldom recoup their fees, and that you might just as well be in low-cost index funds, or exchange-traded funds (ETIFs or ETFs).

Most funds lag their benchmark index after fees, and the few that outperform usually cannot be identified up front. The mutual fund industry is asking you to pay for things that it cannot be relied upon to deliver. You should insist only on funds with 10-year track records, which have beaten their benchmarks. “Show me the money.”

Active managers are fated to lag the market in the long run, mostly because of the drag created by their own fees. Active management is practiced almost universally by broker-sold “load” mutual fund companies. They almost never offer passively-managed investments.

“The true secret to wealth accumulation is getting strong dividend yields, and reinvesting them over a long period.” (Kim Shannon, Sionna Investment Managers) Dividend mutual funds are more resistant to bear markets than growth equity funds, and usually outperform them, with much less risk or volatility. That’s because underlying companies need real earnings to pay out regular quarterly dividends – a sign of corporate strength. Dividend increases are indicative of a positive outlook for the future. Since 1926, 40% of the return from U.S. equities came from reinvested dividends. Interest rates are so low in the U.S. – about 1% – that some American dividends pay three or four times more than interest.

The quintessential Peter Lynch described his perfect stock as “a boring company in a boring industry – far from the beaten track.”

You will find more on investing and trading strategies at: commodity trading rules, currency trading strategy, stock market investing basics, and stock market successful trading strategies

Trivia of the Month

“Triple Witching” refers to the volatility associated with quarterly expirations of stock options, index options and index futures. It occurs on the third Friday in March, June, September and December. Index and stock options expire monthly. With triple witching, index futures contracts also expire at the same time. The significance is the fact that market makers in the index option pit employ index futures to offset their option positions.

If Monday opens opposite to triple-witching Friday’s close, then Friday’s action was probably a result of the unwinding of positions. If Monday carries on from triple-witching Friday’s close, then Friday’s action was probably a reflection of the mood of the market.

The Dow Jones Industrial Average is the most widely followed index as a gauge of market performance. It was originally introduced by Charles Dow in 1884, and consisted of 11 companies – mostly railway stocks. In 1896, the Dow Jones Industrial Average was published, along side the renamed Dow Jones Railroad Index (now the Dow Jones Transportation Index). The industrial index contained 12 companies, including American Tobacco and General Electric. General Electric is the only survivor.

Bonds outperformed stocks between 1999 and 2002. The last time bonds returned more than stocks over a three-year period was between 1929 and 1932.

On the way up, clients want a relative rate of return. On the way down, they want a real rate of return. On the way down, advisors like to brag about relative rates of return, which don’t put food on the table, nor do they pay the bills.

Good News for Stock Traders

In my book, I make reference to a free piece of software for trading stocks. A fund manager and trader recently checked it out, and thought it was awesome. He has been using it ever since, fed by Datek’s real time streamer. Before, he was paying for two real time services. In the process, he has been able to get his spreadsheets updated on a real time basis. You can do this yourself through their server, or with a little programming. Or, you can buy an add-on from somebody who has already done the programming for a whopping US$20. The fund manager and trader prepaid for 12 months saving US$24 on the US$7 per month charge. He is saving US$176 on real tick data. On top of all that, he cancelled a portion of Trade Station that he wasn’t using, and saved another US$80 per month.

A lot of newbie traders, and even experienced ones, in search of commodity trading rules, a currency trading strategy, stock market investing basics, and stock market successful trading strategies, fail in this business because they just play at it, and don’t fully commit. You must pass a mental barrier, a personal Rubicon. The landscape approaching this barrier – the personal point of no return – differs from the landscape beyond it.

You will find the straight bill of goods on trading in my book by clicking here: commodity trading rules, currency trading strategy, stock market investing basics, and stock market successful trading strategies

The Forex: The Hottest Market

This section is all about my own personal currency trading strategy as it relates to the Forex market.

“I've recently converted from futures to the FX markets. Needless to say, that was the right move to consistent profitability. Your book and e-books were the main reasons for switching. Many thanks for sharing your insight on this wonderful market. It's so much easier to trade than the E-mini contracts.” (just one of my many happy customers)

And, another customer wrote in, “Can you tell me why people, and someone like myself, have been 'stuck' with trading futures and options for years? I am still puzzled.”

And yet another … “I have been reading up and going on courses for the last two years. The last course I went on was an options course, which lasted for two days. It was only about options and trading stocks, but I still think your book is better.”

And on it goes … “Just to inform you last Friday I started with $38,640 and until yesterday I made $ 9900. I can't say thanks enough for your teaching and support.”

“I LOVE YOUR BOOK … I have studied it repeatedly, and now I want to jump in on the Forex markets.”

“It is interesting how may times your program is accurate, and that when it isn’t it is calling a change of guard.” (a long-time stock trader and fund manager)

Enough already.

Important Announcement from FX Solutions

My currency trading strategy includes recommending the absolute best market maker brokers – at least those that pass my scrutiny, and that of traders whose opinions I respect and value. One such broker is FX Solutions.

FX Solutions are proud to announce their upgraded version of Global Trading System 2.2. The Global Trading System is proprietary software developed in-house by the FX Solutions IT department. Since the creation of G.T.S., their IT department has been constantly working on the enhancement of their superior online trading software. The new Global Trading System 2.2 features:

Worldwide Access to G.T.S. anywhere, anytime.
Optimized connection speed ensures faster response time.
Multiple Rate Views, including two customizable views with trading functionality.
Streaming Tick Chart displays historical tick data when changed.
Charting Tab now includes preset data ranges for each chart interval.
Ability to change currency pair within a chart.
Additional preset data ranges to existing change of chart interval within a chart.
Additional four new preset chart schemes and two sample chart schemes that can be used as a template for customizing your personal chart scheme.
Additional chart options, which allow you to customize and save your chart scheme preferences.

If you are an existing customer, you can upgrade to the new version. If you are a new customer, you can open a demo account, and try it out. If you have any questions or problems, please feel free to e-mail either thomas@fxsol.com or myself. You can reach their Web site by clicking here: currency trading strategy number two

Effective July 3rd FX Solutions announced 3 pip spread in USD/JPY, making it the lowest in the industry. The EUR/USD was already at 3. They offer 3 - 4 pips spread on most accounts (standard & mini account).

3 in EUR/USD
3 in USD/JPY
4 in GBP/USD
5 in USD/CHF

In addition, you can now customize the currency pair selection. Bring up the G.T.S. rate view window II, and click the blue arrow to customize currency pairs.

You can customize currency chart layout, chart mechanics, scheme, and much more! Just follow the simple steps below:

1. Open any Forex charts on Global Trading System.
2. Click on [ View ].
3. Click on [ Chart Options ].
Now you know why FX Solutions is one of my favorite picks as a market maker broker. Their trading platform will only get better from here.

At FX Solutions, if you are self-trading a standard account where each lot has a value of 100,000 base currency, you can trade up to 100 lots at a time equaling 10,000,000.00 without any fill/execution problems. To quote Stefan Fudge, “You will never have a need to trade more than one currency (euro) with that kind of liquidity! 100 lots at once is big-time trading.”

Thinking about the Forex and a currency trading strategy to trade it with? The trading world is abuzz with talk about the Forex, and my currency trading strategy is certainly becoming the talk of the town. The Forex does $1.5 trillion per day, which is 30 times the size of all U.S. equity markets – 50 times larger than the NYSE alone! The $30 billion-per-day futures market doesn’t even come close. 95% of all currency trading is conducted over the Forex. By comparison, the currency futures market is shrinking, and represents only one percent of the size of the cash market.

The Forex is the largest financial market and is always liquid 24X7. It is not subject to engineering by any one entity. And, the average daily range for the four major pairs is US$1,040 per lot. Compare that to the other markets, and you’ll soon discover why the Forex is attracting so much attention these days.

Most professional traders catch only three-to-four really great trades a week, if that! Not so with the Forex – especially with my currency trading strategy. Here, the timeframe is more like a day. And, a professional doesn’t have to worry about 7,800 stocks, or 72 commodities, and all the underlying rules that accompany those tradables. With the Forex, a trader only has to think about the four major currency pairs – and pure technical analysis. The average daily range of 104 pips (read, US$1,040 per lot) for all four pairs far surpasses that of any other market. It also has a much longer “length of line” (intraday swings), which offers more “swing-trading” opportunities. Lots of action for both novice and professional alike. Salad days are here at the Forex!

The two Forex market maker brokers I personally recommend, after a lot of input from other traders, research, and soul searching, offer superior Internet dealing software, fast and efficient execution, instant online trading, and charts – all for FREE. The efficiency of trading with either of these two market makers means that you no longer have to pay commissions on your futures or stock trades – and Forex trading is commission-FREE as always. Their FREE online software improves your trading performance by giving you the edge in execution, market information, and account management. Combine either platform with my currency trading strategy, and you’ve got a winner.

To preview the trading software and register for a free demo account, go to currency trading strategy number one for offering number one, and currency trading strategy number two for offering number two. They’re both equally as good, but I’ll let you be the judge as to which one you like the best. When you open a funded account at either of these two locations, please mention my name (Peter R. Bain) in the application, and I’ll support you all the way to the bank.

When you let me know that you have opened your funded account, you will immediately get access to my own personal Forex trading examples on a daily basis, and receive a “free” copy of my e-book on my own personal currency trading strategy style for the Forex called “Before You Press Enter” – just for the asking. Let me know when your account is open, and they’re both yours for FREE. One heckuva deal. See you at the top.

With a demo account at either location, you can trade “virtual” money, until you feel comfortable with the process.

Don’t get me wrong. I like the other markets too. But, this is the new kid on the block, and it’s hot. If you like futures, you’ll LOVE the Forex! It will really get your trading mojo going. What’s not to like? “EVERYBODY’S TRADING IT” is reason enough for you to trade it too.

I recently spoke with a long-time stock broker who confided in me that he wished he had discovered the Forex a lot sooner. He just recently saw the light and made the switch. It’s never too late.

I get tons of kudos about my currency trading strategy on a regular basis, but here are just some of the more recent ones:

Fred Horinbein, Myrtle Beach, S.C.: “I have read several books and many articles about trading and, though they were good, I rate your book and articles way above them. Your recommendations are not only clearer, but easier to use in actual trading. Thanks, and keep your great newsletters coming.”

M. Kelly Hamilton: “My sister loves you. She is on summer break from being a full-time teacher of 18 years, and is now considering quitting, and making Forex trading her new profession. Apparently, she had gotten pretty good at it. She called me to tell me how well she is doing, and wants me to get involved with it.”

M.A. Müller: “I must say that the pivot points do give me some direction in my currency trading strategy.”

Charles Beere, Australia: “Love your pivot points.”

Twaine Shick: “Thank you AGAIN for your never-ending support and assistance. I appreciate it more than I can say!!! I am SINCERELY grateful & appreciative of all of your wisdom, insight, helpfulness, kindness and knowledge! I am grateful to you every day for giving me the knowledge (and assistance) to learn something that I enjoy so much – that will also enable me to earn a living!!”

William Holliday: “I think ‘One More Zero’ is great. I also like your book.”
Randy Baker, California: “Peter, love your book.”

Dan Schachtel, New Jersey: “Thanks, Peter, because for the 89 dollars I really learned a lot that’s helping me now.”

Dan Grabowski, New Jersey: “I want compliment you on your book and your Web site. They are very informative, and most importantly your ideas work! You definitely helped my trading.”

Mike McNally, Massachusetts: “Peter, I am enjoying your book very much, and I am going through it chapter by chapter.”

Stefan Fudge, Alabama: “Mr. Bain introduced me to Forex trading as a whole. If it weren't for him, I would still be stuck in the silly stock market. I owe a lot to Mr. Bain! The proprietary trade station at FX Solutions makes FXCM’s look like a joke! If more people knew about the products at FX Solutions, I believe they would attract many more accounts.”

Currency Trading Strategy

I doff my hat to Mark van Greunen of South Africa for coming up with the following two currency trading strategy tips:

Currency Trading Strategy Tip 1: “I received this entry/exit strategy from a friend the other day, and it works relatively well – if not all the time.

ENTRY – Plot 2 Exp or 2 SMA and a 21 Exp or 21 SMA; on cross-over, you buy, or sell; you can reduce the 21 MA to an 18 for a tighter entry.

EXIT – Plot a 2 Exp or a 2 SMA (same as above), and a 6 Exp or 6 SMA; on cross-over, you exit.

I prefer using 3, 6, and 18 Exponential Moving Averages.

Coupled with your Pivot Points, this strategy works really well. This is a really simple approach for entry/exits – yet it works well.”

Currency Trading Strategy Tip 2: “Bollinger Bands - When price is in consolidation (sideways moving market), and price moves up or down, touches, and then breaks through a Bollinger Band, there is a 70% chance that price will continue to move in the same direction. Such a move is sometimes good for at least 40 pips. This is because currencies trend well.

Bollinger Bands are good when the trend is strong (up or down), as the candles hug, break through the band, and keep you in the trend.

If the trend is bearish, look for a bullish candle that starts and forms from outside the band, as this would be your indication to look for a move in the opposite direction.”

Currency Trading Strategy Tip 3: This tip comes from a group of young traders I have been working with over the past two and a half months. They have scaled back their trades, and are more into position-trading the Forex for the time being – due to the limited size of their accounts – until they build them up. They look for confirmation of a trade by looking at the one-hour chart for iron-clad signals. A good strategy for newbie traders. But, there is nothing wrong with this approach, no matter what your experience level is. I have seen good trades that have lasted 24 hours, and two and a half months – on two separate occasions recently. You can trade off the daily, one-hour or 15-minute charts. I recommend you use the five-minute chart on that rare occasion where you want to study price action at strategic points – say around pivot points – or at the end of a long run, where you see a wide-range bar on the 15-minute chart. There is too much noise on the five-minute chart to trade it effectively.

In the News: China is considering widening its Yuan peg, thereby allowing its currency more room to fluctuate against the U.S. dollar. The country’s imports of crude oil would be less expensive with a stronger Yuan, since oil is denominated in U.S. dollars. But, this approach may not appease hardliners, who advocate a fully convertible, unmanaged Yuan. They see the Yuan as undervalued by 15% to 40%. The downside to such a strategy, of course, is that it could backfire. The Yuan could just as easily tumble due to economic or political turmoil down the road, if the invisible hand of the market is left to determine its value.

Hot Commodities, Currencies, Stocks

Hot Commodities

According to my interpretation of the latest commitments of traders data, the following commodities futures represent good trading opportunities to the long side: corn, soybeans, and soybean oil. Soybeans and soybean oil are experiencing backwardation (premium), which makes them even more potent as long trades. Also, copper and silver are shaping up as good short candidates. Please adhere to the 11 commodity trading rules outlined in the May edition of this Newsletter. You can read it by going to: commodity trading rules

MACD is a good indicator to help you trade those commodities. You can read all about it at: commodity trading rules

My book was originally inspired by commodities futures, and the profit potential they stood for. You too can get your very own copy at: commodity trading rules

“Dr. Copper” is often regarded as the most prescient of commodities because of its industrial use. That market isn’t evincing great optimism about a burst of demand any time soon, as it is shaping up as a good short situation.

Hot Currencies

The four major pairs (EUR/USD, USD/JPY, GBP/USD, USD/CHF) are always hot – each and every day of the week. That never changes from session to session. That’s the nice thing about trading currencies on the Forex. You only have to worry about four entities, rather than 7,800 stocks, or 72 commodities. Of course, you can get the scoop at: currency trading strategy

Hot Tech Stocks and Real Gems

Boston Scientific Corp. (BSX/NYSE): Makes a wide range of medical devices.

The Chubb Corporation (CB/NYSE): Insurer.

Day traders have rediscovered the NASDAQ – more specifically Internet stocks of the Far East like:

Sina Corp. (SINA/NASDAQ)

This Chinese Internet play on the NASDAQ is soaring, and represents a good trading opportunity. From an investment perspective, this stock carries risks, but they are more than offset by the growth prospects of this company. Happy punting everybody.

Another NASDAQ hottie:

Applied Materials Inc. (AMAT/NASDAQ)

Brokerages are on the mend, after three years of cost cutting and prayer. Traders are plowing back into the trading arena. This in turn is driving up the shares of discount brokerages, the likes of which include Ameritrade (AMTD/NASDAQ).

At last, the bleeding stops, at least for now. But, be careful. I am talking about trading opportunities above – not long-term investment situations. There is a big difference.

How about five stocks that have consistently paid 15 – 20% in annual dividends – paid in monthly distributions – and have done so for years? Well, here they are: PVX, NCN, ERF, TRU, PGH.

Trading Techniques

For Stocks: It’s one thing to know what to buy, but it’s an entirely different matter when it comes time to sell. Many traders get giddy over paper profits, and then watch much of those gains evaporate into thin air.

For the trading technique you should use to trade the above stocks, please refer to section 7 of the last newsletter (July): stock market successful trading strategies

For Commodities: For Commodities: Please go to the May, 2003 newsletter: commodity trading rules

For Currencies: See Section 6 above – Currency Trading Strategy – plus the April, 2003 newsletter: currency trading strategy

For Stocks, Commodities, or Indicies: In next month’s issue of this Newsletter, I will reveal to you the “4-9-18 Formula.” So, be sure to read that edition when it comes out. In the meantime, let me leave you with this tip: RSI pegs tops above 70%, and lows below 30%.

Advice from the most powerful trader on Wall Street, Steve Cohen: “Cut losses by bailing out of losing positions fast. Don’t let a losing position sit there. Always ask yourself, what more can I do, what did I do wrong, how can I do better?”

Just one of the many trading tips you will find at: commodity trading rules, currency trading strategy, stock market investing basics, and stock market successful trading strategies

Cautionary Footnote

Tech stocks are too highly priced, and are supported by little more than momentum and liquidity. They are great trading vehicles right now, but that’s about all.

Equities are looking pricey when you consider the forward price/earnings ratio on the NASDAQ composite at 40:1.

Please see the comment on the S&P 500 at the beginning of the Market Commentary below.

Call Buying Versus Covered Call Writing

When index options are trading at, say, 38% implied volatility (symbol VIX at BigCharts.com), which is high (meaning options are overpriced), you may wish to focus on option writing strategies, rather than buying calls or puts, or sell naked put calls, or use put spreads. When they are trading at, say, 23%, then you might consider option buying strategies. Slightly out-of-the-money calls, at 23% implied volatility, would be trading at half what they would be at 38%.

If the market continues to rise, the covered call writer’s profit is fixed, whereas the call buyer’s position continues to improve. If the market declines, the covered call position would be safe, so long as the underlying tradable remained above the strike price. Not so with the straight call position. It would be in trouble.

If you are bullish on the market, bullish strategies encompass not only call buying, but also covered call writing, and naked put writing. But, just because you may be bullish on the market does not mean that you should rush out, and pay too much for the calls. Invariably, when you least expect it, the market will go up, but your options won’t.

The same could be said for when you buy growth stocks versus value stocks. There’s a time and place for both, depending upon where we are in the business cycle. There are times when you would not want to pay too much for growth stocks, and there are times when you wouldn’t want to hold value stocks, and forsake potential in a rising market.

The CBOE volatility index (VIX) has been below 25% since the first of May, making this the longest period of low volatility since the March through June period in 2002. That period was just before the S&P 500 index swoon of 300 points. (Please see the comment on the S&P 500 at the beginning of the Market Commentary below.) The VIX measures the volatility being implied by the close-to-the-money options on the S&P 100 index.

If you are looking for some bearish option strategies, the most obvious strategy is to buy puts, either on your individual stocks, or on some broad market index, such as the S&P 500. Usually, If you are bearish on your stocks, it is better to just dump them, rather than buying puts on them. However, the argument against that approach this time around is that growth stocks have been leading the pack, and option premiums are at low levels.

So, look for contracts with at least three months left to expiry, considering the fact that the closer an option is to expiry, the faster its value erodes, because of the passage of time.

Normally, it is wise to pay up to buy longer-term options. However, here you are simply trying to protect your shares through the purchase of puts.

Of course, another “option” to buying protection is to purchase index puts.

For the record, put options rise when the value of the underlying stock declines.

My book addresses commodities, currencies, market indexes, stocks – and, of course, options too. Its all waiting for you at: commodity trading rules, currency trading strategy, stock market investing basics, and stock market successful trading strategies

Market Commentary: The Good, the Bad, & the Ugly

The S&P 500 has three technical considerations working against it right now: it has broken its upward trend line, it has put in a double top, and it is below its 50-bar moving average. This could all add up to a retracement of one-third, 50%, or two-thirds. MACD has pulled back to its neutral 0 line, which means overbought pressures have eased. Ditto for the NASDAQ – plus, it has a bearish ‘head and shoulders’ pattern in place.

Despite MACD’s easing, I am still concerned about the first three technical factors I mentioned – plus the VIX being below 25% since May. (Please see that comment in the Options Section above.) Check it out for yourself by keying in the symbols sp500 and vix at BigCharts.com.

Further, Mark Hulbert, editor of the Hulbert Financial Digest, notes that the number of 52-week lows is beginning to out-number the 52-week highs posted among stocks trading on the NYSE. He also notes that the eclipsing of 52-week highs by 52-week lows was evident in the market in the late summer and early fall run-up to the crash of 1987.

Ralph Acampora, managing director of global equity research at Prudential Financial, and one of the best-known technical analysts, notes that trading patterns and volumes are pointing to the new distribution of large-cap stocks taking place – i.e., large blocks of these stocks being quietly sold into the market, meaning that big holders are not confident that their positions will hold up.

Dundee Securities technical analyst Roman Franko’s take on this market rally is: the “rally puts the markets back in the upside of a four-year cycle that can last at least into the spring of 2004.” Long term, though, he expects the markets to swoon again to gut-wrenching lows. He is basing his analysis on Elliott Wave theory.

And, one more thing … commitments of traders data reveals that the funds are at an extreme short position on the S&P 500, and the commercials are going shorter with their positions – although they are nowhere near as short as the funds.

Mr. Franko’s technical theory seems to be corroborated by the funnymentals, which are now bullish. The money supply keeps increasing, and the dollar seems to be firming. The Fed appears to be printing money to prevent deflation. But, the price of gold and other commodities pointing to inflationary pressures would have us believe otherwise. Could it just be that the real story is that Mr. Bush is assured of re-election, if the market keeps going up, and the economy improves in 2004? Hmmmmm ….. Stay tuned.

Anyway, the economy is not wonderful, and it may not be so for quite some time to come, but it’s alright, I suppose. Thirteen Federal Reserve interest rate cuts, and stimulation from the Bush Administration, are facilitating what looks like a sustainable recovery for the foreseeable future – at least on the surface. But, the technicals seem to be painting a much different picture – in the short term, at least.

So, call it what you want … a tradable rally in an on-going bear market, a brief bull market in a secular bear market, or the beginning of a secular bull market … it’s a nice buzz while it lasts. Whatever it is, the recovery is unfolding fitfully. A fitting description might very well read: bullish within a long-term bear scenario. David Rosenberg, chief North American economist with Merrill Lynch calls it “a bear market rally … a trader’s market, and a trader’s rally.”

Does this emperor have clothes? Not even practitioners of the dismal science know for sure. Only time will tell. In the meantime, keep chopping wood and carrying water.

If there is any part of this Newsletter than you cannot see because of the e-mail program you are using, please view it online at: commodity trading rules, currency trading strategy, stock market investing basics, and stock market successful trading strategies

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Please feel free to send your inquiries, be they comments, feedback, questions or suggestions, to me at: prbain@tradingsmarts.com

If you have any ideas or suggestions for future articles, they would be most welcome. I especially invite any trading tips, strategies or techniques you may have that you wish to bring forward, and share with others. If I include them in future editions of this Newsletter, you will most certainly get proper credit and recognition. You will also receive a free bonus from me for your time and trouble.

Happy trades to you, and here’s to your health, happiness, and good relationships!

Thank you for reading this Newsletter! Have a great day!

Sincerely,

Peter R. Bain
www.tradingsmarts.com

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Disclaimer: I am basically just a good guy doing good business. I’m not here to rip you off. Quite the contrary, I try my absolute darnest to bring you the very best picks and trading strategies, none of which I benefit from personally. I don’t promote or make any goofy promises about short-term predictions or daring speculations. There is a risk to investing and trading, so please use money you have set aside for that purpose, and guard it with your life by using good money management practices and principles, and good trading techniques. Please don’t invest or trade money you can ill afford to lose. This is a business. It is not about gambling.

Considering the fact that I don’t know your capabilities, and how well you are going to apply my advice, I am sure you will understand it when I say I can’t be held responsible for your decisions, and subsequent actions, based on the information contained in this Newsletter. However, there is no reason why you shouldn’t benefit by following my suggestions. The information in this Newsletter has been thoroughly researched, and is sound. It is considered to be accurate to the best of my ability and best efforts.

Please note: The Securities Commission in the jurisdiction where I live and work precludes me from giving you trading advice or recommendations on any form of security. So, I present my picks for educational and informational purposes only. Please proceed at your own risk, should you decide to act on any of the tradables mentioned above.

Thank you for acknowledging this, and good trades to you!

E-mail: prbain@tradingsmarts.com
Web site address: www.tradingsmarts.com

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