Weekly weakness. Mon Jun 20

Another bout of procrastination in Europe over Greek debt was enough to prompt a rally in European and US stock indices, albeit one which tended to weaken over the course of the day. The postponement of potential write downs on Greek debt also helped the Aussie market to rally about half a percent but that gain has nearly vanished now in a repeat of Friday's pattern.

In a stock specific sense, LYC rallied up to 196 early on a company press release that things are progressing smoothly with the building of the processing plant in Malaysia. That's good news but the crucial news concerns the approval – or not – of the plant by the Malaysian government and this is due by the end of the month. It reminds me that I need to be careful with this stock as a yes could force a decent rally. The stock is still up 4.5 at 188.5. I shorted more stock at 194 and bought it back at 189 and I still have most of the short from Friday.

Twenty years ago, I heard a story about an older client who simply wrote puts on his favoured stocks until he eventually became long a stock, after which time he'd write calls on that stock. Despite spending more than a decade as a market maker and understanding that this is simply a buy write and can be disastrous in bear markets, the strategy is still quite appealing and makes some sort of sense when you have money on the sidelines. Apparently, this client did very well over many years, and I assume it was because he didn't apply the strategy thoughtlessly and chose his stocks wisely.

Having dithered over my call selling when trying to get my longer term strategy started, I realise that it would be a lot less hassle to simply follow this example. With that in mind, I've been looking at weekly charts of some of the major stocks, which are the ones with liquid option markets. Unfortunately, the charts are just too weak to seriously look at initiating my plan. Some of the biggest falls occur in markets which have already been weak for some time and with QE2 coming to an end, there's every chance of liquidation in the US if the Fed doesn't immediately step up to the plate with more stimulus.

An example is RIO. At 7815, it's on a prospective PE of around 7 for the next 2 years, the consensus target price is $110 and it's close to the bottom of the trading range. The trouble is, it has just made a sell signal with the trade below 7850 last week and if the 7671 support doesn't hold, the next plausible level is August 2010's swing high at 7422. This may turn out to be a great buying level but the level of risk is too high.

11.49 The market is recovering, up 19, and looks potentially bullish on an intraday basis. Asian markets are generally firmer and I'm watching my short positions carefully, but so far there's no need to take action.

12.55 The index doesn't seem to be under any real pressure but the gains have faded and the rise is just 5 points. The 10 minute chart shows the story, a marginally lower peak relative to Friday then the disappointment (for the longs) kicks in. One of these days, there'll be a second pulse up and it could still happen today.

1.18 Underwater now, down 3.

I doubled up on the OSH Jun 675 puts earlier, at 12.5, and that's turning out well as light crude is under pressure in the Asian session. The stock has given up minor gains to be down 9 at 656 and the puts are pretty much intrinsic with expiry on Thursday.

I've also gone long June puts in FMG. The chart is weak now but the best entry level was at 625 last Wednesday. The stock has stalled at 617 for 2 days so I think there's a reasonable chance that the consolidation is over and another down leg is due. The reason for buying the puts is that it's basically a 625 stop plus a few cents of premium. Long them at 18 with the stock at 609.

2.32 Out of a third of the OSH puts at 20 since the stock has hit the recent low and could have a minor bounce. Also, the position was on the large side. I've had a salutary lesson this month in FMG through punting rather than trading via options and I need to stick to my disciplines.

3.37 The index is following the recent script, now down 23. FMG has dropped to 601 but OSH is holding support at 655. LYC is clinging onto gains, up 1.5 at 185.5.

3.52 Further to the point about the longer term charts being weak. BHP has now broken the August 2010 swing high which was at 4165. BHP is currently at 4135.

4.14 We closed at 4452. This is the low for the day and a loss of 33 points. Even the safe haven, TLS, eventually fell a cent. I bought back another 5k of LYC at 185.5. The report is complete but the judgement will not be made for 10 days.

Reprieve. Fri Jun 17

Some signs of a steadying US economy has given us a reprieve this morning and the index has bounced back 1% at 11.10 am.

For the time being we have a potential double bottom but I've been hunting around for retracement trades and can't find any standouts. Actually, IPL looks ok but it has gone a bit far from the opening low for me to chase it now. I still have some Jun 400 calls which I've written off but with expiry due next Thursday, I'm likely to run out of time.

I've also been pondering a long in TOL on the basis of a potential double bottom and with the last leg up having overlapped the previous swing low showing that selling momentum has faded. However, I feel that I should get with the program and sit on the sidelines until I can sell a rally. I'm doing too many marginal little retracement trades, I generally make a little out of them but I'm also then swimming against the current of the major trend.

11.42 Just had an expiry day punt in TLS, buying Jun 301 puts at 2.5 cents. The rally has a 5 wave look about it, everyone is long it and a recovery rally this morning has quickly faded to leave 2 secondary highs at 307.

12.10 Glad I resisted the temptation to punt the rally, the gain has slipped to 19 points with Asian markets generally ticking lower.

I've added another short in OSH, buying Jun 675 puts at 12.5. I traded the little reversal rally which stopped short of the 690ish resistance. I'm looking for a move to fresh lows in a sector which is under pressure.

1.55 The gains are drifting away. The index rallied off an intraday low of 4482, up 3, but that second bounce is fading now.

It's nice to be going with the tide of events for a change. I added a third short position in LYC...a bit late, because the latest sell signal was at 199 but I'm short a few at 195 with a stop at 201. It's also a sell on a weekly scale as the stock breaks the early May low of 197.

3.28 Actually, I'm not quite swimming with the current in TLS where the stock has been in an uptrend but the shorts in LYC and OSH are going well as the market has continued to drop, now down 9.

3.38 With that drop into the red, the Asx 200 has dipped below the March lows confirming a trend change in the bigger picture. The next swing lows are 4314 in late August, 2010, and 4182 in early July of last year.

4.12 Some late buying helped the index to close higher by 6 points as we await Greek developments over the weekend. It could go either way, which was why I bought puts today where possible in order to limit damage if there's a strong rebound. LYC kept falling, closing at 184. I bought a handful at 185.

Failure to launch. Thu Jun 16

It's really not happening for this market. Another new low followed overnight weakness with the XJO index slipping below the 4512 low to hit 4507. It's been my fear, with this reversal trade, that the overseas downtrends would provide too much of a headwind and that's proving to be the case.

One bright spot is that the sell off has been perfunctory, even those who have been correctly bearish must be wary of putting on further short positions here and speculative longs bailing out are likely to be pretty limited.

I sold out of OSH on the open at 679, simply because the stock was going to open down by only a few cents and it had been stalling for 3 sessions. Instead, I punted a couple of other things on an intraday basis which I thought were overdone.

I sold out a third of my FMG last night at 630 so I'm using 615 as the stop for the rest. I should have hit the opening bid of 625 in hindsight because it's down to 619, but there was an announcement from foundation investor, Leucadia, that they had sold 82 million shares which is a large chunk of its holding. The stock is one of the most highly recommended in the market so I wanted to see if it would respond positively to the announcement.

12.27 The market is hovering around the 4510 area with Chinese and Korean markets fairly hard hit. I stopped out of FMG at 615, close to the intraday low, while OSH is actually up now! Story of this month.

1.20 I've just been reading Tim Price's "The Price of Everything" blog. As usual, he is making the case about the debasement of money but it's a case worth making and his big picture view has been spot on. This time, (referring to Chris Martenson's blog), he argues that despite the Fed's attempts to pump up the US economy, there is no way that credit growth will see anything like the exponential growth of the last 4 decades. My view is that the new austerity mirrors that of the post depression era and, allied with the improbability of reckless lending recurring in the next generation, the next bull market may be a very long term in coming.

I've started playing with a longer term book but I fear that I'm premature; the market needs to be super cheap and charting much more cleanly than it is now. I'm inclined to sell out my positions, which are only marginally against me, and look for another opportunity.  Essentially, a buy write book is selling a put on the market and the downside risk is probably too large at the moment. Valuations are good but everyone fears that forward estimates must come down and until the downgrades are in, there's unlikely to be serious bargain hunting. The positions have broken support too, so having failed to write calls as I looked for more of a rally (no regrets about that, a strategy is a strategy), I can simply stop out.

1.40 The Australian market may well be due a rally but the weekly chart shows that the Asx 200 made a lower high in April and a break of the March low would confirm a trend change.

In the last year or so I've tended to do alright on the short side during sharp falls after good rallies (contrarian, reversals) but far less well in long slow downtrends. I need to get my head around the likelihood that we've seen the post GFC recovery. The big picture would imply a move below the 2009 low so I need to reverse my mindset to be patient with sell offs and impatient with rallies.

3.04 There has been another leg down in the market with the index closing in on the significant March low of 4477. Unless there's a strong rally in the last hour, the closing level will be the lowest since August last year.

I've been stopped out of all my positions. My longer term book has been postponed until I see a better base in the market but it hasn't been a disaster. I committed $300k into 5 stocks and it has cost me about 1.5%. If I had a 300 grand long across 5 of my more volatile trading stocks, the loss would have been more like 5%.

There's every chance I might be looking to trade reversal rallies in my trading watchlist over the next few days but I want to keep in mind the sense that markets are now structurally weak and longer term opportunities are going to be quite specific.

4.12 I was reading about confirmation bias in terms of the climate change debate earlier today and it was interesting reading the comments with people musing on the issue. It's not a fresh idea to traders, we deal with our own confirmation bias every day of the week and try to find ways around it. I've been well aware of being too bullish over the last 6 months but have really struggled to change my behaviour. In some ways, it comes down to the longer term road map I have of the market, and the index has come very close to confirming a major fork in the road with a close at 4479.2 which is less than 2 points above a weekly sell signal. If something like the FTSE is any indicator, the break is a foregone conclusion. This is one nasty looking chart.

Actually, that's not quite true...I've had a bearish long term view for a while but have still struggled to put on short positions. It's probably because our economy is reasonably healthy – despite the resources sector forcing up rates – and the difference is that the public has changed its behaviour. Plenty of companies are prospering but nobody wants to buy, it's hard to get my head around the change. One thing I've just done is to follow Tim Price's recommendation and sign up to Chris Martenson's blog. He seems to be an uber bear and the commenters come across as survivalists so it's probably a nice antidote to reading all the buy recommendations from brokers.

Punch drunk. Wed Jun 15

The market is groggy after taking so many hits lately and despite good follow through on Wall Street, the index is down 7 points after 38 minutes. The commentary is that we had our bounce on the China data yesterday, but US indices moved further than the gains implied by the futures in our session yesterday and our market is heavily leveraged to Chinese activity.

FMG has been upgraded by another broker and I've bought stock at 633 on a breakout. I still have Jun 650 calls but I need a chunky move to get my money back there and they expire in a week. My stop on this stock is 615 although I'll pull it up to 626 (just below today's low) if the stock can push on today.

10.51 Just noticed that there was a pre-market crossing of 18 million shares in FMG at 626. Wonder if that was the stock overhanging the market...

11.50 The index is down 14 as Asian markets are flat to lower. Reserve bank governor Glenn Stevens speaks later today so that may influence the market. The question is how hawkish will the rhetoric be? All the signs are that the RBA is too far ahead of the curve and may have tipped the non-resource sector into recession. Real estate troubles are brewing and plenty of businesses are struggling or going bust. The joker in the pack has been a change in the psyche of the consumer from spendthrift to scrooge. The extent of this change has been unexpected and I'm sure that nobody expected the belt tightening to go on for as long as it has. It seems to me that the mood of austerity is actually deepening despite economic conditions being broadly positive.

On top of that, you have the snowball effect of internet shopping. After a few years of buying the odd book or CD, consumers are spreading their wings and buying all sorts of products on the net. I've just bought some prescription sunglasses at the local optometrist and I see that I'm paying 2 to 3 times the price that I need to; now that I have my prescription details, I won't be wasting money next time.

The effect of this is that it won't just be bookshops that are closing down but all sorts of businesses besides. Fat retail margins have supported an edifice of ridiculous rents and property trusts may be the next domino. I can certainly see the rationale behind shorting Aussie banks too as their fortunes are inextricably tied up with this. Like most scenarios, though, it's a matter of working out what is priced in already.

1.25 Thanks Glenn....NOT. Down 20 points as the RBA governor re-iterates his desire to flay the skin off the back of the economy.

1.47 Still dropping, down 28 points but on low volume, characteristic lately. Stock futures roll over tomorrow morning so there may be more meaningful action then. Broadly, I'm expecting the low which was struck yesterday to hold. It was a strong reversal and you'd hope for more follow through.

WBC gave me the opportunity to sell calls at the stock level I was hoping for, a little below the last swing high of 2228. Unfortunately, I was too bullish after the reversal and let the chance slip by.

2.53 I'm getting cold feet about my long position in OST. I bought a few at 190.5 and did some better buying at 181. The stock has tried to rally off this higher low but the best it did was a brief push to 187.5. The stock is in a long term downtrend so the chances of this being a key turning point are low. I was simply looking for a rally to 195-200 but no acceleration has come through. Unless it starts to look great in the next hour, I'd rather just get out.

3.02 The bid was getting thin in OST, so I stopped out at 182.5. This despite Prime Minister Gillard's soothing words that the steel industry would be looked after under the new carbon tax regime. The magic pudding carbon tax regime.

4.12 The final loss was 18 points but the 60 minute chart looks ok, as if today was a retracement with the possibility of more gains ahead. A good performance after Glenn Stevens tipped a bucket of iced water into the lap of the economy.

Countdown. Tue Jun 14

Chinese CPI, PPI, industrial production and retail sales for May will be announced at midday. As far as I can tell, sentiment is such that we sell off on slowing growth and we sell off on recovering growth. With the index doing quite well to hold above last week's low of 4518, it's not hard to imagine a failure this afternoon.

Commodities and commodity stocks were weaker over the two trading sessions since last Friday's close. This was on the basis of Friday's trade data from China. US oil stocks were hit hard – see Greg Peel's round up on FnArena – but the WTI oil price fall was at odds with the rise in Brent which more and more investors now see as the benchmark.

10.30 The normal course of events is that investors take losses strategically as the Australian tax year end approaches on June 30th. This year, I'm not sure that there will be many gains to offset against losses so I doubt that this will have much influence. By the last week of the month, window dressing and bargain hunting will generally take over. I'm not convinced that sentiment will encourage bargain hunting but I can imagine that pension funds will be keen to see the index push higher from here and valuations are such that they can probably afford to throw good money at the market. Encouragingly, banks and financials have quickly shrugged off some early weakness and I'm hoping that this is an early sign of late year buying.

11.06 Spoke too soon.....there goes support at 4518 with the market having slumped 47 points.

12.02 The headline CPI is 5.5% cf expectations of 5.4% but because retail sales were below and industrial activity above forecasts, the initial reaction is reasonably positive. The AUD is rallying and that's probably the best proxy for risk appetite. Market down 28 at 4534.

1.43 The market is up 7, 4 or 5 points off a recent high at 4574.

As part of my longer term trading book, I've got a new long in SUN. Entry is 817 and stop is 780. I'm looking for a move to 850 before writing calls.

2.57 Almost a key reversal on both the daily chart and potentially the weekly too – although that would have to wait till Friday for confirmation. The market is up 24 points and the top 20 is outperforming with a rise of 0.8%.

4.12 Up 23 to 4585 which is not quite a key reversal day but definitely a reversal and the market broke the high of the last 5 days.

Suncorp closed well at 830.