Tiger Gao Market Watch: 04/26/2009

today's market analysis

1. consolidation day

2. the up trend is still holding well

The Danger of Leveraged ETFs (ZT)

There is a tremendous misconception that leveraged (double, triple, long or short) ETFs are to be used as long-term investments. On the surface they make a lot of sense. You want to hedge your stock portfolio, for instance, so you buy a double short ETF of the market like SDS (double short of S&P 500) or QID (double short of Nasdaq 100) and for each 1% decline of the market you make 2%. It does sound like a great deal.

Leveraged ETFs have been sold as panacea to this market volatility, but a panacea they are not. If used as investment (not trading) vehicles they may cause a lot of harm to your portfolio even if you were “right” on their use. They should not be used as a long term investment, but only for short-term trading (i.e. days not months).

Daily compounding (recalculation) will cause their returns to deviate substantially from the underlying index. The math is too complex and too boring (here is an article by Morningstar that explains this well), but instead let me demonstrate by this very real example (click here to see the chart ). Let suppose that six months ago you had a great insight that financial stocks will decline. You figured to get bigger bang for the buck you’ll buy a double short of Dow Jones Financial Index (a simple plain vanilla long ETF for this index goes by symbol IYF). The index and thus IYF declined almost 20% in six months thus you’d expect your double short (SKF) would be up about 40%. However, if you look at the chart below you’ll see that it declined almost 60% instead, as much as double long ETF (UYG) of the same underlying index.

Note that over the short term (days) these ETFs seem to work. This is one of those investments where you have to make sure that you nail the timing perfectly, otherwise you are screwed.

In the long run, all the 2X, 3X ETF will go to near zero, because the underlying instrument is options, not stocks, there is time decay.

To me, the gist of this article is about the dangers of leveraged ANYTHING; hedge funds ETFs, real estate, you name it.

Another chart need to study later - PDS

Happy Friday

we must recognize the possibility yesterday was a false breakout or bull trap – a new high that suckers in late-to-the-party bulls before the selling begins.

April is in the books, so the end of the traditionally strong Nov – Apr time period has come true this year,again.

Now I’m not very comfortable holding long when the overall trend is down and the market has rallied 30% off it lows. I’m just being a little cautious during the grinding period.

I’m still of the opinion we have a big move coming. A squeeze that gets us well into the 900s or a sell-off that puts us back near 800. Don't gamble on it.

Home Run Stocks

Low price relative to value (P/E,price/book value,Cash rich, debt free or few debt,revenue/market value)
Insiders are buying
Leverage (operating cost less)
Price patterns
Story (easily get investors excited or form some bubbles)

Key Stages of Price Movements Patterns

Sideways
Accumulations
Mark up
Distribution

Some charts to study later -3

Some charts to study later -2

Some charts to study later

EBS and CBOU weekly chart

Preserve your emergency saving with muni funds

For example, this one:

Wells Fargo Advantage Ult S/T Mun In Inv (SMUAX)

The investment seeks current income exempt from federal income tax consistent with capital preservation. The fund normally invests at least 80% of assets in municipal securities that pay interest exempt from federal income tax, but not necessarily the federal alternative minimum tax (AMT). It invests up to 20% of assets in securities that pay interest subject to federal income taxes, including federal AMT. The fund invests up to 10% of assets in below investment-grade municipal securities. The fund's average effective maturity is one year or less.

Total Expense Ratio:0.72%

The fund can be bought and sold any time without any fees.

My ABSOLUTE selling rules

Tiger Gao's No. 1 Selling Rule

After a reaction, if the new extreme point is lower then the previous extreme point. Get out as soon as possible since one gap down could make you in trouble. See the chart of SQNM.

My this selling rule could let you avoid such nightmare.

Tiger Gao's No. 2 Selling Rule:

Pivot point new higher high top, compared to previous major high
The nearest uptrend line broken down
Substantial profits between the new high and the nearest high in a short time

Tiger Gao's No. 3 Selling Rule:

The technical analysis target is reached after the breakout

When you are right, how to sit tight

Being right and sit tight is the only way to EARN BIG in the stock market. Even though it is HARD to let the profit run instead of letting the loss run, which is the human nature!

My holding for the long run rule is:

IF after reaction, a new higher extreme point is made, then continue to let the profit run.

SO, if you want to buy in, DON'T BUY IN THE REACTION ALTHOUGH IT IS CHEAP, buy ONLY WHEN THE PREVIOUS EXTREME POINT IS BROKEN OUT because it signals the up trend is still valid.

BUY IN THE REACTION IS A PURE GAMBLING, ALTHOUGH IT IS CHEAP, because the market can go either direction.

Please note, I don't recommend the above stocks. I just use them to demonstrate how to follow the trend.

An example to learn how a trend is reversed

and how to set up a trading

When an extreme point (1.58) is broken out, buy in, sell when profit target is reached (1.58+ 1.58-0.59=2.57).

A perfect technical trade set up.

So it's fool to buy when the stock is in consolidation because it could break out in either direction, it's a pure gambling and in the long run, you will lose.

Today's analysis

The up trend still holds today even though the bulls are tired again. It is an extreme point day today. This seems strong up trend makes me starts to think about the chance for re-testing of the low of March. Please also notice that Chrysler files for Chapter 11 bankruptcy today. But the stock market is still very strong.
Anyway, we need to follow the market trend. Never fight against the market.

Today's Gap will

be filled. As predicted this morning, this gap is not good for bulls..

If this afternoon, the market continues the down trend, I expect Monday could be bloody..

List of Recent Gap Up Stocks

LUD: Sep-8-2009

LGND (Could be the player, setup is in the shape, wait for the second time)

EK (could be a TJTS pattern complete play)

LCC( back to ~2 may be a good entry point. The chart pattern could be developed well)

DAC (If 2.80 can hold it well, could evolve to a nice pattern set up finally)

NBG BAA NSU

GY PSTI GRVY TRGT MSCS FLOW IBAS TUES IRE BRNC EMMSP SDBT SPP AIB

LYTS VICL HRB DGW CPC ARTX GILT AUDC CAEI JAZZ XRTX

CGEN MGRM MDCO NYNY PWRD SWHC TSTR MTU SMP SOA ZZ

ALVR MIPI TSTR ALVR SOAP HOO LZB AEZS CTIC EVII HBAN OIIM RSO CAV

/CRXX/SKS/WH/LLNW/SEH/AKNS/CDIC/ESLR/SHFL/LEA/GRH/CSUN/FCEL/MRNA

/MRVL/STAA/OPWV/ANPI/ENDO/KERX/SLM/FLIR/PMTI/RSOL/AIB/JTX/RAD/SOL

/BRKS/CONN/COWN/NVAX/WIND/XTNT/BOBE/HUBG/TIVO/CBAK/DDUP/UNFI

/VLNC/SAY/UFS/AEZS/CASA/ELRN/FEP/LNUX/TOF/CGY/AFSI/DPTR/FTGX/FTI

/GNK/JCG/ODP/NG/NGD/

My day trading secrets

1. wait 2 days after the extreme point day, if no trend reversal happens,
follow the trend, long/short at the reaction

2. take profits when next extreme point is made

The profit target is: the depth of the reaction from the extreme point

Also, remember that never hold day trading positions for more than 2 days. The goal of day trading is to seek some capital appreciation while maintain liquidity and the defensive purpose.

Today's gap is not good

for bulls, it may kill the bulls..

Today's comments

Today is the last day of April, so perhaps some window dressing is in order. All major indexes are in the process of breaking out. A solid up move is needed today and follow through is needed tomorrow.

Be on your toes. We could get a breakout and run today…the breakout could also get sold into.

It's better wait for the market's clear direction before jump in too soon. Day trading is safe, though.

How to find a home run stock

http://www.viddler.com/player/607c55d3/

How to follow the trend

Once a trend is confirmed, sit tight and don't be afraid, unless you are stopped out.

Today's close comments

Even though the GDP is worse than expected, the market still trend up well after about two days rest. This shows the Market's internal bullish nature recently. However, it gives up some gains finally this afternoon. The bulls really need a rest before it can go higher. Also noticed that 200MA has been touched.

If you are trend followers, you should be bulls. However, be aware of the Bears since they may sit just in the corner. Using your trailings to protect your gains.

Extreme point day.

Tomorrow's Market Movement Prediction

1. Tomorrow the market will gap down

2. Tomorrow the market will close down

Fed Day

Today the FOMC will announce their ‘target’ for overnight rates. No change is expected. But CNBC will turn their statement into a 3-ring circus and analyze every single word they say. Wait until about 20 min after the 2:15 announcement to see if a trend is formed into the close.

Today's Market Analysis

Today is a consolidation day. Bears win a little bit over bulls. Bears should be aware of the Bull's last crazy run, which may or may not happen. Bulls should also be aware of Bears sudden attack, that could happen any time, sooner than you can think. Swine flu continues to dominate the news. Bank's stress test will be released soon. BAC, C, and some other banks may not in a good shape fundamentally. If swine flu and bank worry scares continue, the market won’t breakout. Otherwise, the market could leg up again. So play the market carefully now.

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