SKF Shorting Strategy

When SKF has climbed to these levels, both in terms of price and 'overboughtness', it has presented a good shorting opportunity.

Note: SKF has only been around for about two years which limits the amount of backtesting that can be done on it. Also, it is amazingly volatile so use caution. I have not tested this strategy with puts; however, I would expect options to add just one more level of shenanigans that SKF is already subject to.

This strategy sells strength, using RSI as its overbought metric. It returns favorable results using everything from a 2 to a 5 day RSI (of course, what is considered overbought needs to be changed depending on which one you use). Below is shown using the 5 day RSI (screenshot 2). Anything over 80 was considered overbought. It covers when the 5 day RSI crosses below 60. Results are shown in the last screen shot. The strategy itself is nothing new but its results on SKF are noteworthy. It may prove to be a good strategy for some of the other derelict ultra long/short ETFs as well.

Shorting XLF

It has been a very profitable trade lately to sell strength in the financial sector. It was a nice surprise to be able to do so after XLFs 3% pop this morning. Stop at 10.42 - plenty of resistance all the way up.

Profit from the chop

XLE - look for oversold/overbought strategies in range bound markets. Here's a good example of XLE chopping around but not in an overly volatile way since it's just an ETF - more conducive to the EOD trader. Experiment with different configurations of RSI, CCI, etc. that are good for identifying opportune times to sell strength and buy weakness.

BHI - descending triangle / overbought

BHI

UTX

The number of trending stocks that aren't screaming overbought is becoming quite small. Most of the ones on my watchlist have pulled quite far from their trendline and most of them still have a 2 day RSI in the upper 90s. We should be getting a pullback early this week and I will be welcoming it as it should open up some better entry points.



I like UTX here for the following reasons
- a lot of open interest on the Call side (AUG 75 and 80)
- just pulled back/bounced off 20 day MA
- still in an upward trend
- NOT overbought
- low risk (if stop is placed just below trendline)
Check out the August or November 75 Calls - if they look too expensive, finance the cost by selling further OTM calls (debit spread). A price target of 75.5 seems reasonable and if it can get through that, next stop, 79.

SPY

The S&P finally broke out above an important technical level and closed above it's 200 day MA. SPY closed at 142.55. While this sounds bullish - remember tomorrow is expiration day and most of the market has become wildly overbought. SPY has a 2 day RSI of almost 97 and so does much of my watchlist. Some key levels, going forward, for the SPY at least, are 144/145 to the upside and 138 to the downside. I recommend getting out at either of these levels should we get there. Further, if we do get as high as 144/145 I recommend selling some OTM credit spreads or ratio spreads on SPY (or similar behaving ETFs) as I think some pullback is imminent. I don't recommend buying Puts, since overbought doesn't mean the stock's going down, it usually represents exhaustion and/or overextension which equates to either a pullback or simply sideways movement until overbought conditions are worked off. This is why a ratio spread can be a good idea. If done right (usually means you have to go a few months out) you will profit on a move up, down, or sideways and only lose from a huge move up. They are similar to selling OTM credit spreads except you have a greater range to make a profit but it does carry more risk should the stock continue past your long leg.

Here is a short list of stocks with their 2 day RSI above 99: MDY, DRYS, IJH, VMC, NAVS, VRSN, DOV, CRS. I believe statistically it's more profitable to go long on oversold stocks (i.e. 2 day RSI less than 05) than it is to go short on those with 2 day RSI above 95. Overbought stocks seems to have more staying power. Either way, some of these, you will find, are otherwise nice looking charts and they should stay on your watchlist - there is a reason why some of these are overbought...

UNP - top of its trading range

With the S&P closing above 1400, a lot of traders have become short-term bullish. This includes myself as I have also made short-term directional bets (via debit spreads) that SPY will make it to 144/145 before finding more resistance.

It is certainly possible that this bullish sentiment has gotten a little out of control, or even perhaps that this move is just a head fake. If you agree of this possibility then you might want to consider balancing your option portfolio by keeping some bearish bets open. Below is a specific way to do just that.

I have been championing the recent move of UNP, ever since it broke out of its ascending triangle pattern at the beginning of April. That said, I think it has become a little bit overextended for the following reasons:
1) UNP has a 2 day RSI of 98.99
2) UNP is now trading at the top of its trading range
Long-term I'm still bullish on UNP; I just like its chance of a pullback. I also think that a realistic price target for this pullback would be former resistance (or 137ish)


Given the aforementioned price target, you could always buy AMT or ITM puts. If you wanted to shoulder some of that expense to help spread out your capital, you could buy a put debit spread (same as vertical spread, same as bear put spread).

Buy the 145 Puts and sell the 135 Puts
This will give you a breakeven point of 142 while risking $305 for a reward of $695. This has a decent risk/reward ratio. The breakeven point refers to 'at expiration'. Ideally, UNP would pullback in one week, you could liquidate your position, lock in 80% of your potential profit, and remove 100% of your risk.

You could buy the 145s and sell the 140s. This will give you a breakeven point of 143 while risking $190 for a reward of $310. Your probability of success goes up (higher B/E point) but your risk/reward ratio goes way down. It's a constant trade-off, as always with options, between risk and reward.

FXI | MON | POT | SPY

What a difference a day can make. It's already time to revisit some recently mentioned setups.



FXI: Overbought. Overall, nice looking chart for the longer-term.















MON: Oversold. Monsanto is among a list of stocks that got hammered after reporting good numbers and raising their outlook. All else equal, it is simply presenting an opportunity.













POT: Another example of a stock that just got hammered after reporting good numbers and raising their outlook. The difference here is the enormous amount of volume that traded today - proceed with caution.












SPY: I thought the bulls were going to do it today but the 139/140 resistance continues to hold. I think it will break sooner than later, especially if XLF can string together another couple days like it did today....

SPY | FLR | MMM | RIMM

Friday has left us overbought; however, a breakout scenario still seems imminent.

If (SPY) can in fact overcome 140 (should earnings continue to meet lowered expectations) 144 may be much tougher. To the right is a five year chart that helps illustrate why - basically 144 represents a key breach in an otherwise seemingly healthy 5 year trend.




Here is a
chart showing
the number of
S&P stocks trading
above their 200 day
moving average.



Below are some more stocks worth watching.

Fluor (FLR) - nice reverse head & shoulders pattern.
If this looks like a bullish opportunity to you, consider debit spreads or calls with an expiration of JUL or OCT and an initial price target of 170 (all-time high set back on Nov 26, 2007).









3M (MMM) - broke out to the upside and closed above 200 day moving average. Potential to revisit 86.







Research in Motion (RIMM) - might be getting ready to have another go at resistance.







Keep in mind some of these are currently overbought so you might want to be patient.


Here is a short clip I recommend watching. It provides a little insight into Dan Sheridan's thought process and how he might have played Google (GOOG) before earnings.
http://www.cboe.com/tradtool/webcast.aspx?movieid=36693&channel=1252