An eMini S&P Update on my “Simple Pattern” for Trading

As I wrote about here and here, there is a simple 3-day pattern that I like a lot.  I liked a lot again the last several days.

In nutshell:

Day 1) Closing price is below the low of the previous day

Day 2) The next day involves no action

Day 3) If the high today takes out the high for Day 2, then buy long and sell at the first profitable close (a stop-loss order is recommended but where to place it is an entirely different topic and one that might require a little experimentation on your own).

If the high for Day 3 DOES NOT take out the high for Day 2 then the pattern is invalidated.

Figure 1 displays all of the Day 3’s on which there would have been an entry signal in the eMini S&P 500 futures contract.1Figure 1 – Jay’s Simple Three-Day Pattern in EMini S&P 500

Last two signals:


Day 1) On 7/24 ES closed below the low on 7/23

Day 2) 7/27 serves as Day 2

Day 3) ES opens on 7/28 above Day 2 high at 2071.25

ES closes on 7/28 at 2087.25

(2087.25 – 2071.25) * 50 = +$812.50 per contract


Day 1) On 7/27 ES closed below the low on 7/24

Day 2) 7/28 serves as Day 2

Day 3) On 7/29 ES trades above Day 2 high of 2089.00.  Buy at 2089.25 sell on close at 2101.50.

(2101.50 – 2089.25) * 50 = +$625 per contract


Like every other trading method I know of, it sure is great.

Especially when it works…..

Jay Kaeppel


Important Things to Watch Right Now (Part 3-Ticker FXB)

Ticker FXB is an ETF that is designed to track the price action of the British Pound.  OK, now I suppose the first reaction for some readers might be to say:

“Wait, I thought you were going to talk about important things.”

And I get that.  When people think of “trading”, the British Pound is typically not the first thing that pops into their mind.  But remember:

Jay’s Trading Maxim #312: Opportunity is where you find it (not necessarily where you want it to be).

And an opportunity may be brewing in the British Pound.

(See also Important Things to Watch Right Now Part 1 and Part 2)

As you can see in Figure 1, FXB price action has formed a short term wedge with price action closing into a very tight range.  On 7/28 price broke out to the upside.  This by itself is not (in my opinion) enough to trigger any action.

1Figure 1 – FXB narrowing price action w/upside breakout (Courtesy: ProfitSource by HUBB)

What I will be watching for is to see if this upside breakout fails.  Because if it does there could some serious downside potential.  The two charts in Figure 2 display the weekly and daily Elliott Wave counts from ProfitSource by HUBB for ticker FXB.

(click to enlarge)2Figure 2 – Weekly and Daily Elliott Wave counts or ticker FXB (Courtesy: ProfitSource by HUBB)

*The daily count has recently completed a five-wave up pattern.  This suggests (albeit for the record, in no way guarantees) limited upside potential in the near-term.

*The weekly count is suggesting that if price starts to break lower it could fall precipitously with a downside target below 140 (from current level around 153).

The purest play would be to sell short British Pound futures contracts.  This also entails significant risk.  Another possibility – and one that involves limited risk – is to buy a put option on ticker FXB.

IMPORTANT NOTE: FXB options are very thinly traded so trading in large quantity might be difficult.  The good news is that although the bid/ask spreads are not necessarily “tight” there are reasonable.  In any event, a trader should consider using limit orders when entering into a position.

One possibility would be to buy an at-the-money put option as displayed in Figures 3 and 4.3Figure 3 – FXB Sep 153 put (Courtesy 4 – FXB Sep 153 put risk curves(Courtesy

Note that this option enjoyed a trading volume of exactly 0 and a bid/ask spread of over 5% (1.75 bid/1.85 ask).  Hence the reason limit orders are important.  Still, the primary focus in the opportunity to “risk a little to (maybe) make alot.”


The bottom line is this:

*There is no guarantee whatsoever that the Pound will be heading lower anytime soon, particularly as sharply lower as projected in the weekly chart in Figure 2.

*FXB options are thinly traded so traders need to pay close attention to bid/ask spreads

*I am not recommending the trade displayed in Figures 3 and 4 – it serves only as an example of “one way to play.”

*The trade shown is Figures 3 and 4 qualifies as nothing more than “speculation”.  For the price of $185 a trader accesses the “potential” (nothing more, nothing less) to gain $1,200 to $1,700 if the British Pound does in fact reverse back to the downside.

Jay Kaeppel


Important Things to Watch Right Now (Part 2-Ticker AAPL)

If you had to pick one stock that gets more attention than any other I think most people would name Apple (ticker AAPL).  As such a widely recognized company its stock represents a major holding in many, many investment portfolios.  As a result of its “leadership” position it can be important to pay attention to the action of its stock.

The latest action in AAPL might give us some pause.  After a long advance form $55 a share in June of 2013 to $134 and change in May of 2015, it can be argued that the chart has formed a head-and-shoulders formation.  For the record, I would guess that some technicians would argue that the formation does not exactly fit the classic head-and-shoulders pattern.  But the primary point is that the stock has taken a couple of shots at breaking out to the upside and has been unable to do so. 1Figure 1 – AAPL at the crossroads

The stock hit a high in late February then fell back and then rallied to a slightly higher high in early May.  In late May and again last week AAPL trie to rally up to the early May high but failed to break through.  Does this mean that this is the “end of the line” for AAPL?  Hardly.  But it does draw a potential resistance area.  In other words, unless and until AAPL breaks out above $134.54 the bull run is in hibernation.

The lowest low recording during the formaiton of the purported head-and-shoulders pattern was $119.22.  So that represent our support “line in the sand”.  According to classic head-and-shoulder theory:

*If AAPL takes out the lowest low achieved while the H and S pattern was forming;

*Then the downside target is equal to the broken support level ($119.22) minus the difference between the high and low within the H and S pattern ($134.54-$119.22 = $15.32), or $103.90 ($119.22 – $15.32).

So keep a close high AAPL. Whether it breaks $134.54 to the upside or $119.22 to the downside could provide an important clue as to what is next for the stock and the overall market.

Jay Kaeppel


Important Things to Watch Right Now (Part 1-Major Market Indexes)

If we look at the four ETFs that track major stock market indexes displayed in Figure 1 – DIA, SPY, IWM and QQQ – we find that three are either flirting with or already below their respective 200-day moving averages and the 4th (QQQ) is threatening to break down through a key technical level.1aFigure 1 – Indexes “on the brink”

We “technical analysis types” make a big deal out of crosses above and below the 200-day moving average.  In reality there is nothing “magical” about this average.  I mean, why not 176 days or 215 days?  The implication is always that if a particular index breaks below its 200-day moving average then a major bear market is about to unfold.  That’s not exactly the proper way to look at.  Moving average don’t “predict” anything, they just tell you the trend “right now.” Which, as it just so happens, is pretty valuable information.  I mean if the trend of the stock market isn’t bullish then why would I want to be fully invested?

There are three key things to remember:

1) You cannot have a major, long-term bull market while price is below the 200-day average;

2) You cannot have a major, long-term bear market while price is above the 200-day average;

3) Whipsaws are a fact of life when dealing with moving averages – i.e., not every break above or below the 200-day average will end up being significant.

The bottom line is this:

The more indexes that drop below their 200-day average and the longer they spend below said averages the greater the danger of a more serious bear market decline.  So it pays to pay attention.

Jay Kaeppel


A (Brief) Seasonal Soybean Swoon Update

You might ask – why emphasize that this is a “brief” update on soybeans?  A show of hands….how many of you would like to read an extended update on soybeans?

That’s what I thought, and hence the emphasis on the word “brief.”

In any event, as I wrote about here, soybeans have showed a seriously unfavorable seasonal trend during most of July into late August (down 30 times in the last 37 years).  The bad news with any seasonal trend is always the fact that there is never any guarantee that it will work “this time around.”

On the other hand, noteworthy seasonal trends only become noteworthy because they are right more often than not.  Plus – as I discussed in the original article – the “bad news for beans in July” theory makes intuitive sense simply because by mid-July traders typically have a pretty good idea of whether or not it will be a good year for soybeans crops. In addition, even in a bad year for bean crops (which equates to higher bean prices due to lower supply – you do remember that whole “supply and demand thing” right?), most of the “fear buying” and hedging has already been done by mid-July and as a result the “risk premium” tends to come out of bean prices to some extent even in a bad year for bean crops. So bean prices have a tendency to be “weak” from July Trading Day #9 through August Trading Day #6.

And some years bean price just simply fall apart.  Like this year for example.

Figure 1 displays the November soybean futures contract starting at the end of July Trading Day #9 when it closed at 1025 (each point represents $50; also for the record a price of 1025 represents a price of $10.25 per bushel of soybeans).  In the nine trading days since beans have plummeted to 933.25.  This represents an open profit of $4,587.50 per futures contract.1Figure 1 – Unfavorable Seasonal period for Soybeans looking, um, unfavorable indeed (Courtesy:

If a trader is holding a short position in any size greater than a 1-lot I would suggest saying “Thank You” to the market Gods and taking some profits right here.  Whether beans will be higher or lower by the end of August Trading Day #6 (the end of the unfavorable seasonal period) is anyone’s guess.  But quick and easy profits don’t come along all that often.

Certainly not often enough.  Can I get an “Amen?”

Jay Kaeppel


A Very Crude Update

A while back I wrote about the potential for crude oil to decline in price – based on nothing but daily and weekly Elliott Wave counts.  As this is an approach that may or may not inspire a lot of confidence (depending primarily on the level to which one is or is not an “Elliotthead”), I highlighted an example “limited risk” way to play (i.e., buying put options).  Please not that I did not say “low risk”, only limited risk.

Yes, there is a difference.  Just to clarify, I refer to buying call or put options as “limited risk” and not “low risk” for the following reason: It is common to hear purveyors of option trading tout the fact that when buying options “you can only lose what you put up.”  Which sounds at first like a positive (and is as far as it offers the aforementioned “limited risk”)?  However, a corollary – and far less positive sounding – way to phrase it is to say “you can only lose 100% of your investment.”

Wait, what?

Precisely.  If you buy a call or put option and it expires worthless you lose 100% of what you put up.  Somehow a loss of 100% and the phrase “low risk” just doesn’t quite compute in my poor addled mind.  But I digress.

The Original Trade

As detailed in the original article the original trade involved buying 70 USO August 15 puts on 5/13 at $0.14 for a total cost and total maximum risk of $980.  Well, things worked out OK.

This trade was adjusted on 7/7 by selling 40 of the 70 puts.  This left a long position of 30 puts and locked in a minimum profit of $140.  Well crude oil continues to tank which is all well and good for this trade.  However, as August expiration draws closer time decay can an extract a heavy toll on this position.

As you can see in Figure 1 and 2 (which displays the expected profit or loss for this trade based on USO price, with each line represented the expected P&L as of a specific day).  Much of the current open profit may just wither away unless USO falls well below $15 a share.  There are only 25 days left until August expiration and Theta (the Greek value denoting how much the trade will lose in one day based solely on time decay) is -$35.1aFigure 1 – Original Trade Adjustment  (Courtesy

2aFigure 2 – Time decay is a danger between now and August expiration  (Courtesy

So it seems like time to “do something.” As always, one could just sell the 30 remaining contracts and take a pretty decent profit.  However, as you can see in Figure 3, the Elliott Wave count is still pointing to potentially lower prices for USO.  So it could make sense to extend this trade.

3aFigure  3 – Elliott Wave still projecting lower for USO (Courtesy: ProfitSource by HUBB)

As you can see in Figure 1 the trade presently has an open profit of +$1,190.  So the goals (at least in this example) are:

*toextend the time left until expiration to potentially garner additional profits, while..

*Not allowing the sizable profit on the original trade to vanish.

So here is one possibility:

*Sell 30 August USO 15 puts at $0.35

*Buy 2 Apr 2016 USO 15 puts at $1.65

The results of this adjustment appear in Figures 4 and 5.  The “Days until Expiration” increases from 25 days to 263 days and Theta declines from a whopping -$35 a day to just -$0.73 a day.4aFigure 4 – Adjusted Trade  (Courtesy 5 – Risk Curves for Adjusted trade  (Courtesy

As you can see in both Figures, we are risking roughly $300 of our open profit (i.e., we are playing with the “house money”) with the hope of making more money if USO does in fact fall to $12 or lower as projected by the Elliott Wave count.

Jay Kaeppel

Margin Debt – Bad or Beautiful?

Well here I go again breaking one of my own cardinal rules again – i.e., being critical of someone else’s writing.  Must be getting cranky in my old age.  Anyway, I recently read an article calling margin debt “an indicator that predicts nothing.”  No the writer is actually technically correct for the most part.  Still this sort of surprised me as I remember learning from Norman Fosback’s 1975 classic “Stock Market Logic” that margin debt was a very useful indicator.  As with a lot of things it depends on how you look at it.

The author in the unnamed article accurately notes the fact that many other analysts are warning that “record margin debt” is a red flag or warning sign.  He also rightly points out that margin debt has been making new highs for several years now with no adverse affect on the stock market.  And up to this point I agree.  In fact, he is correct that there is no bearish implication to high and/or rising margin debt. Well, at least up to a point.  However, as Fosback taught, it is not so much the “level” of margin debt that matters as it is the “trend.”

A Trading Method Using Margin Debt and Credit Balances in Margin Accounts

There are some technical (read “extremely boring”) explanations that have to be made regarding the data used in this test (DO NOT STOP READING!!!!) If necessary, just skip the boring nitty gritty for now and skip ahead.  You have my permission).

The data comes from this site:

*I am using two sets of data:

1) Margin Debt

2) Credit balances in margin accounts

*There is no data listed for credit balances in margin accounts for the entire year of 1966.  December 1965 lists a value of $1,666 and January 1967 lists a value of $640. So for lack of a better method I simply took the difference and divided by 13 to get $78.92 and subtracted that value from the running total for each month in 1966 (i.e., December 1965 = $1,666, January 1966 = $1,587.08, February 1966 = $1508.16, etc.).

*I calculate a 12-month moving average for margin debt. If the current month’s reading is above the 12-month moving average the indicator is considered bullish and vice versa.1Figure 1 – Monthly Margin Debt versus 12-month moving average

*I calculate a 12-month moving average for free credit balances in margin accounts.     If the current month’s reading is above the 12-month moving average the indicator is considered bullish and vice versa.2Figure 2 – Monthly Free Credit Balances in Margin Accounts versus 12-month moving average

*The data for a given month is released sometime during the following month (I am not sure if it is uniform from month to month in terms of release date).  So to analyze actual market performance based on indicator readings I created (for lack of a more creative name – Jay’s Margin/Credit Balance Index – that gets updated at the end of the month:

*At the end of the month, if the margin debt value for the previous month (which was released some time during the current month) is above the 12-month average of monthly margin debt readings, the Model gets +1 point (for example if June data is released on July 15th and the latest reading is above the 12-month average then at the close on July 31st the Index gets +1 point added for the month of August).

*At the end of the month, if the free credit balances in margin account for the previous month (which was released some time during the current month) is above the 12-month average of monthly free credit balances in margin accounts, the Model gets +1 point (for example if June data is released on July 15th and the latest reading is above the 12-month average then at the close on July 31st the Index gets +1 point added for the month of August).

*So at the end of each month Jay’s Margin/Credit Balance Index will read 0, +1 or +2.3Figure 3 – Jay’s Margin/Credit Balance Index (Dec 1959-July 2015)

As you can see, sometimes both measures are favorable (+2 readings), sometimes only one is favorable (+1 readings) and sometimes neither are favorable (0 readings).

Does any of this matter?  Consider the following:

Jay’s Margin/Credit Balance Index  Index = 0 Index > 0
# Months 100 566
# Months Up 50 (50%) 336 (59.4%)
# Months Down 50 (50%) 230 (40.6%)
Average Mthly % +(-) +0.0004% +0.0068%
Median Mthly % +(-) (-0.0002%) +0.0083%
$1,000 invested in DJIA $908 $28,561
Cumulative % Return (-9.2%) +2,756%


So it is correct to say that “record margin debt” predicts nothing and that fretting and worrying about it is pointless.  However, this also sort of misses the main point – i.e., it is the “trend” that matters and not the “level”.  Rising margin debt almost invariably accompanies a bull market.  But as Yin follow Yang (at least according to people who say things like that), “all good things gotta come to an end.”  And so too will the favorable reading from Jay’s Margin/Credit Balance Index (FYI, margin debt is presently in an uptrend and credit balances are not so the Index stands at +1 and will remain so through at least the end of August).

In the meantime just remember that the difference between +2,756% (the gain for the Dow when Jay’s Margin/Credit Index > 0) and -9.2% (the loss for the Dow when Jay’s Margin/Credit Index = 0) is what we “quantitative types” refer to as “statistically significant.”

Bottom Line: Enjoy the ride….because it won’t last forever.

Jay Kaeppel


A Final Word on Natural Gas Unfavorable Seasonal Period

As I wrote about here and here natural gas has showed a historical tendency to decline in price between June Trading Day #11 and July Trading Day #14 (Yes, I concur that it sounds ridiculous on the face of it, but, hey, the numbers are what the numbers are).

For the record, between the close on 6/15/15 and 7/21/15:

*September natural gas futures declined from 2.942 to 2.894, or a gain of $480 per a 1-lot short position (see Figure 1).1Figure 1 – September Natural Gas (Courtesy: ProfitSource by HUBB)

*The ETF ticker UNG declined from $14.03 a share to $13.87, or -1.14% (See Figure 2)2Figure 2 – ETF ticker UNG (Courtesy: ProfitSource by HUBB)

Not exactly earth-shattering but a profit is a profit.  For the record, this is the 23rd time in the past 26 years that natural gas has showed a loss during this period (88.5% of the time)

Also for the record in earlier articles I highlighted an example of an option trade to take advantage of this trend and also highlighted a profit-taking example.

See also Jay Kaeppel Named Portfolio Manager for New Investment Program 

Jay Kaeppel


Time to Catch the Falling (Gold Stock) Safe?

I usually like to do my own research and report on that.  But I am not above ripping off, er, I mean “highlighting interesting work” from other analysts.

See also Jay Kaeppel Named Portfolio Manager for New Investment Program 

A case in point is the chart in Figure 1 below which was created by Kimble Charting Solutions.  The chart displays the price action for the Gold Bugs Index (ticker HUI) and highlights those (rare) trading days when HUI declined by -10% or more.

1Figure 1 – Gold Bugs Index 1-day declines of -10% or more (Source: Kimble Charting Solutions)

There were four periods when this happened:

1999 – There was a brief spike a few months later, but overall the “buy signal” generated here was quite “early” as gold tock prices subsequently fell quite sharply into late 2000 before finally bottoming out.

2002 – The first -10% day was also a little early in terms of “picking a bottom” but clearly worked out fine for a long-term investor.  The second -10% reading occurred in July 2002, by my figuring about three days before “the bottom”.  Note however that it did take a matter of several years for prices to work significantly higher.  So remember this is more of a “perspective” indicator and not a “short-term” but signal.

2008: Buying in at the first, second or even third “circle” shown during 2008 would have been the equivalent of “catching a falling safe” as price continued to plummet to the eventual low. Nevertheless, from a long-term perspective even these “too early” signals were followed by significant percentage price gains over the next several years and the “circles” that occurred near the 2008 bottom were followed by multi-year gains of several hundred percent.

2015: As you can see in Figure 2, on 7/21/15 ticker HUI lost over -10% in single day.  Thus a new oversold “circle” is drawn at the far right hand side of Figure 1 above.2Figure 2 – Ticker HUI declines -12% in one day (Source: ProfitSource by HUBB)


So is it time to buy gold stocks?  Well that is the question isn’t it?  If the history of this particular indicator is any guide:

A) There is a good chance that it is a little “early” to start piling heavily into gold stocks.

B) We are beginning to witness “capitulation” as investors dump gold stocks.

C) We should not be surprised to see gold stocks trading significantly higher over the next several years.

Investors willing to adopt a longer-term perspective (I think there a still a few of them who haven’t yet died of old age out there) might consider one of two strategies:

1) Begin accumulating shares of gold stocks (maybe using ETF ticker GDX or Fidelity FSAGX) with the understanding that things could get a whole lot worse before they get better.

2) Wait for gold stocks to bottom out and turn higher using some sort of trend-following method (a simple moving average?) to identify when the overall trend has finally reversed to the upside.  Then buy gold stocks with the anticipation that the follow through to the upside will be significant.

Of course, there is always Option 3), i.e., do nothing.  Which is clearly the “low risk, low reward” approach when it comes to gold stocks.

Jay Kaeppel


I Want to Believe, But…..

I love a good bull market as much as anyone.  And I don’t like to fight the trend.  So if the stock market – having bounced off of an oversold situation recently – wants to burst forth to new highs I for one will not be a naysayer.

Er, OK, let me amend that.  I might be a naysayer, but I won’t fight the trend.

OK, wait, let me amend that.  I might be a naysayer and I won’t fight the trend, but I might consider hedging my bets depending upon what happens next.

Stuff Naysayers Say

Following the selloff in late June, early July, the stock market – particularly the Nasdaq – has rallied sharply.  In fact the Nasdaq – powered by the “cool stocks” like Google, Apple and Netflix – has gone pretty much vertical during this recent advance.  But there are a few concerns, to wit:

*As you can see in Figure 1, the Nasdaq (represented by ETF ticker QQQ) is the only major index that has broken out (so far) to a new high.  This doesn’t mean that other won’t follow suit.  But until they do the whole thing feels a little “iffy”.

(click to enlarge)1Figure 1 – Nasdaq at new highs; Others…not so much (at least not yet); Courtesy:

*Another yellow flag occurs when an index goes up but the majority of stocks do not.  In Figure 2 you can see that on 7/20 the Nasdaq 100 registered its 8th consecutive up day.  However, note the Advance/Decline and New High/New Low numbers for the overall Nasdaq on the same day – i.e., both are “underwater.”


Figure 2 – The index is “Up”, the majority of stock are not

Two important things to note  regarding this divergence between index price and market action:

*A one day reading like this is not “the end of the world” nor is it a clear sign of “The Top”.

*At the same time, it is not a positive sign.

What’s a Bull To Do?

If you are in the stock market you have several choices at this point, including:

1) Do nothing.

2) Do nothing but worry a lot.

3) Sell everything.

4) Keep a close eye on whether SPY, RUT and VTI follow the lead of QQQ…..or vice versa.

Sure, human nature being what it is, most people will gravitate to #’s 1 and 2, but I am going to go ahead and suggest #4.


I wrote recently about an impending confluence of potentially favorable seasonal trends.  On that basis – and since it is a pre-election year – I “want to believe” in the bull and to give the bullish trend the benefit of the doubt.  So hopefully, SPY, RUT and VTI breakout to the upside and away we go.

But if the don’t – and especially if QQQ drops back below the red line drawn on Figure 1 – at the very least a bit of hedging may well be in order.

Jay Kaeppel