Market Crash on Monday April 27, 2015?

by JDH on March 14, 2015

Historically, market crashes dont happen from the peak.  The market makes a new high, then corrects, then goes up, and only when all buying is exhausted does the market crash.

The DOW peaked at 14,164 on October 7, 2007, and didnt bottom until November 26, 2007, at 12,743, a 10% loss in 48 days.

On August 28, 2008 the DOW hit 11,715.  On October 27, 2008 the DOW hit 8,176.  That was a 30% drop in 60 days.

The final bottom didnt occur until March 6, 2009 when the DOW touched 6,626.94, a drop of 53% from the peak in October, 2007.

My point is this: the market doesnt make a new high and then crash.  Corrections, or crashes, occur gradually, and then all at once.  That may appear to be a contradictory statement, but it isnt.  The market peaks, then eases, and then as buyers get nervous downward pressure builds and then you have a crash.

Historically these surprise crashes tend to happen somewhere in the range of 55 days after a peak, as shown in the above examples.  Could be 48 days.  Could be 60, but its somewhere in that range.

Which brings us to March 2, 2015 when the DOW made an all-time high of 18,288.63, and we have had no highs since then.  On Thursday and Friday the DOW dropped into the 17,630 range, a decrease of 4% since the peak. That could be it.  More money may be printed on Monday, the markets recover, and its on to new highs.

But, if we dont see a new high before Monday April 27, 2015, which is 56 days since the peak, it may be time to get nervous, because thats when unexpected crashes happen.

This six plus year bull market is fueled entirely by government money printing.  Structural unemployment remains very high (labor force participation is very low, which leads to artificially impressive unemployment numbers), consumer debt is high, and commodity prices are low, which is not a sign of an economic recovery.

Something has to give at some point, so holding cash is not a bad idea.  Cash will be king after the crash.

My plan?  Its not April yet, so let the good times roll.  Im doing covered writes every week on my core holdings, to mitigate my losses, or to leave me positioned for gains.  So far, its worked out well.  We shall see.

Thanks for reading.  See you next week.

I guess we found out what Mr. Fibonacci thinks of gold

by JDH on March 7, 2015

Last week I asked a simple question: Does Mr. Fibonacci like gold.  In that article I drew in the Fibonacci lines, and concluded that a logical base for gold would be around $1,198.  I further stated that:

the “bottom” at the start of the week was exactly $1,190, very close to an exact Fibonacci level.  From that bottom gold has inched higher.  It is therefore possible that the correction from mid January has ended, and gold will move higher.

Of course the alternate interpretation is also possible, and that is that gold is going down, and will continue to go down.

It would appear that the alternate view was correct, and we therefore learn an important lesson.  If you want to assume that Fibonacci levels are actually real, then you have to believe them exactly.  If $1,198 is the level, and gold had already dropped to $1,190 in the week, you cant say oh well, that was close, I guess the bottom is in.  If you really believe this stuff, then the answer was obvious: the level was breached, so we are going lower.

I find the technical analysis stuff amusing, but I dont bet the farm on it.

With that background, heres the gold chart for the last six months, including the close on Friday:

Not a pretty site.  I drew in the horizontal orange line from Fridays low, and it takes us to approximately the same levels we were at back in November, and December, and roughly at the start of the year.

In other words, gold is now flat on the year.  Three months, no movement.  Lots of up and down, but in the end it signifies nothing.

So what do we conclude from this?  Pick your poison:

Option 1: A trend in motion stays in motion, and since gold is obviously going down, it will continue to do so.

Option 2: The chart shows an obvious double bottom, and therefore this is the new bottom, and from here gold will rise.

To decide which option is correct, I flipped a coin, but unfortunately it landed on its edge, so I cant tell you what will happen.  So, lets look at another chart:

This is my bestest gold stock, RGL.TO – Royal Gold Inc.  which obviously took a hit on Friday, along with the rest of the gold market.  Whats interesting is that when you compare the Royal Gold chart to the chart of gold itself, Royals chart has a slightly more upward trajectory than does gold.

So?

I dont know, other than Im not jumping off the bridge yet.  We are at a somewhat obvious inflection point.  Specifically:

• the RSI is 32.52, a level not seen since November 2014, so an uptick from here is likely;
• the stock is now well below the 50 and 200 day moving averages, and while it can stay below those levels for a month or more, its unlikely to stay there much longer, unless we are truly in a bear market.
• also, I drew and orange and blue line on the chart, so that must mean something.

In the face of this carnage, whats the plan?  Same as before.  If you want to hold the stock long term, do covered writes.

On March 4 I sold the March $88 calls against Royal Gold for $1.60.  By the end of the day Friday the bid/ask was 10 cents to 30 cents.  Ive put in a buy to close order at 10 cents, so if its filled I pocket the premium of $1.50 on the stock.  Of course thats small compensation for a stock that fell almost $7 on Friday, but since I assume it will bounce back and be much higher in the months and years ahead, Im not sweating the daily fluctuations.

Stated another way: The stock is trading at about the same level as it was trading on New Years Day.  I have made or lost nothing.  However, by doing covered writes and grabbing some extra premium here and there, I can actually generate a return on a stock thats flat.

I have employed the same strategy on other stocks.

I hold AAPL Apple. and when it was announced on Friday that it will be entering the DOW it managed to hold a small gain, even while the DOW fell close to 300 points.  On March 4 I sold the Apple March 130 calls for 74 cents.  Since Apple was below $130 after the close on Friday those options expire worthless, and I keep my 74 cents.  74 cents isnt a big number on a stock that closed at $126.60, but if I could do that every week, thats a 30% return per year.

I cant do it every week, but grabbing a few cents here and there is not a horrible strategy.

Thats the report for this week.  Ill have more ramblings next week. Thanks for reading.  See you then.