Sizing up the options for emerging markets ETF, EEM

Thanks to one of my trading buddies for sharing some info on a huge put trade being placed onto EEM! That involved one trade of 55,000 June 25 puts, bought at $1.16, against open interest of just 20,614. This indicates new positions, though less than the 20-day average overall volume but triple the average for June strikes. It also places the June expiration put/call ratio at 47, with this one trade constituting virtually all the volume for this month. Sure - it's possible this can be one very large hedge against a large long position, and therefore not necessarily a bearish signal for this exchange-traded fund. It would calculate to 1-1 protection on approximately $152 million as measured by the price of the EEM shares. Let's take a look at what the charts may be saying.

First, the daily chart shows EEM nudging up to the 200-day moving average - a classic resistance level. If surmounted then it can become support, but the first assumption must be to expect turbulence at best, and a barrier at worst that could tumble EEM to re-test its November 2008 or March 2009 lows. Volumes have been better on recent up days than recent down days, but looking at the weekly chart, the volumes have been declining as the rally has continued, so rally fuel may be dwindling. On the bigger picture, monthly chart, I can count five waves up and - so far - three waves down. The monthly chart pattern can be interpreted as a trap door to go long after a capitulation low, although better volumes on the rise would be more encouraging - and on this chart pattern, it's imperative that EEM remain above the March 2009 $20 low.

All in all, it looks reasonable for anyone with a substantial long position to put on a substantial hedge, certainly into the 200-day moving average. If it does drop, then the 20-day and 50-day moving averages should be logical levels to look for support. $25 is about in the middle of where those averages stand today - which may have played into the put buyer's strike choice. If it turns out that the Elliott Wave places EEM in a large 4th wave upward correction, and the next move is a 5th wave down (just speculation right now!), then put buyers will reap additional rewards. A good reason to keep an eye on the $20 level too.

Is this an early indicator the real estate market may improve?

Discussions of whether real estate is ready to rally higher have been building in some circles. Here's one indicator that might (emphasize might) support that suggestion - IYR, the exchange-traded fund for tracking real estate, now shows up as one of the three "top bearish" in the ISE's put/call data. Its ISEE rating is actually down to "5" as measured by 3,425 puts over just 183 calls. Normally, when sentiment grows this bearish on an asset, it's a signal that there's far too much pessimism, and that it's time to take the contrarian view. In this case, it may be an early sign that the homebuilders and real estate may be ready to move up soon.

However, I would never use this single data point to sound the "all clear" for real estate. For example, it's possible that some big investors or traders may be using put options on IYR as a way to hedge long positions in individual companies or components of this sector. So one should always do diligence before making an investment or trade decision.

What about chart analysis? It's obvious that real estate has fallen very, very far, so it isn't surprising that the IYR still looks, shall we say, dismal. However, it has been in a consolidation pattern for a few months now. And there are a few faint signs of hope. One is the RSI indicator showing divergence (which you can see where the RSI indicator did not make a new low, at the same time the IYR price did make a new low). Another is that IYR's 50-day moving average has begun to curve upward. That doesn't mean that IYR has completely bottomed and is ready to move only upward from now on. But it does suggest that the IYR price might have a realistic chance to try moving up to at least test its 200-day moving average. Finally, and perhaps most helpful, the volumes as shown on the weekly chart do actually show greater volumes on the rise up from the November lows. Although the volumes on the swoon since then were not small, they do appear to be less than the amount of volumes on the rise. That explains why the technical indicators on the daily chart have begun to show signs of improvement.

Here are the charts:




So, the contrarian would say that it may be time for the real estate sector to move. But the weekly and monthly charts don't give any comfort that any upward movement would have staying power. So, make no mistake about this - only the most hardy of investors or traders might want to consider acting on these faint signs of life. There's no assurance that any move up would be anything more than a counter-trend bear market rally.

Update on DAG/agricultural commodities

Consistent with the bullish point of view for soybeans, corn and grains - DAG is looking well positioned. "Ideal" would be a light-volume pullback and then a resumption upward ... will see!

Equities and bonds review; with Chartsedge 12/15 week cycle chart and other comments

Above are Chartsedge's weekly cycle charts for the SPX and Nasdaq.

Those who have been reading on this site (or that browse using the labels for prior posts here) know that I've tried to correlate whether the mid-December time frame identified by the Bradley model cycle chart would be a cycle low or high ... and not sure I have a satisfactory answer yet!

Generally, I believe that equities either made their intermediate low in October, or may have one more low (either a new low, or an intermediate low) soon ... in any case, expecting a significant rally in equities into early to mid-2009. In Elliott Wave terms, expecting the rally to be either a large "B" wave or a large "X" wave.

However, anyone who's read my posts for a while also knows that I'm toying with another alternative - the idea that while the S&P 500 traces out a "B" or "X" wave, the Dow Jones Industrial Average could actually make new highs. The theoretical premise for this comes from an appendix in the Elliott Wave Principle book by Frost & Prechter, the idea that the S&P 500 Elliott Wave count is five years "ahead" of the DJIA EW count. This idea would allow the DJIA, so long as it remains above the 2002/2003 lows, to play out something like this: the Oct. 2007 highs would be wave 1 of a large ending diagonal, the lows down around here would be its wave 2, and ahead of us would like waves 3, 4, and 5. These would trace out as large zigzag ABC movements. The DJIA wave 3 up could correspond to a wave A up in SPX; and DJIA waves 4 down and 5 up could correspond to SPX waves B down and C up (in the latter case, completing the X wave). However .... with the normal Fibonacci time relationships of ending diagonal triangle waves, I doubt that all this could play out in the expected time frame.

Another idea that would come closer to "fitting" the time frame expected, would be if the Oct. 2007 highs were an ending diagonal wave 3 in the DJIA, with the remaining A up, B down, and C up for its wave 5 to new highs, corresponding to an ABC=X in the S&P 500.

Well - just theories for now! Meantime, I'm treading carefully in equities. The swing trade vehicles I typically use are SSO (double-long ETF) and SDS (double-short ETF for the S&P 500; QLD (double-long ETF) and QID (double-short ETF) for the Nasdaq-based QQQQ; and of course, DDM (double-long ETF) and DXD (double-short ETF) for the Dow Jones Industrial Average.

For bonds - I currently use either TLT to be long (tracks the 20-year Treasury bonds), or TBT (inverse TLT) to be short. [Using options is tempting but with the possibility that a trend reversal still needs to finish playing out, I'm concerned about the loss of premium unless using options with much longer-term expiration dates).] I'm expecting bonds to move generally inversely to gold, although obviously the timing of bonds is not as directly correlated to gold as is the dollar (as shown in my prior post today).

(There are, of course, plenty of other ETF's for sectors within the equities markets, such as the financials, semi-conductors, bio-technology, materials, internets, and on and on. There are plenty of sites that cover these, and I know that Bob Carver usually updates most or all of these in his Market Clues daily updates as just one place to get a good list of them.)

Gold, Oil, Dollar, Commodities - Chartsedge gold cycle chart for 12/15 week; and some other comments

Above is Chartsedge's weekly cycle chart for gold for the upcoming week. [Chartsedge also provides cycle forecasting charts for the month and upcoming three-month (quarter) period, by subscription; check the Chartsedge website listed in the "other sites of interest" to the right.]

Some additional comments of my own - if you check the bigger picture charts of gold I have posted here, you will see that I'm among those who believe gold has made a bottom here, most likely counted in Elliott Wave terms as a large WXY (there may be other EW counts, and you can of course also look at Tony Caldaro's site (also under the "other sites of interest") to check out his charts and EW counts on gold. The question being, what's next? I have a long-term Fibonacci objective at 1192, and there are others who are counting (either via Wolfe waves, Lucas numbers, or other methods) and expecting gold in the 1000-1200 range. Perhaps this will express as a "B" wave which could either be a regular flat "B" wave high that doesn't make a new high, or could be an expanded flat that does see its "B" wave make a new high. Either way, it should make this climb over a multi-month period into early to mid-2009. My chart below shows some Fibonacci levels that should prove significant during this move; and, I marked a hypothetical Andrews fork that may provide channel support too.

As trading vehicles, I typically use DGP (double-long gold) when going long gold, and DZZ (double-short gold) when short.

My chart of the dollar includes some Fibonacci retrace levels for the expected, accompanying move down. I don't use etf's for trading the dollar, as such, although UUP is an etf that tracks the dollar (1:1 correspondence, not double). While I didn't mark an Andrews pitchfork, I did mark some hypothetical channel lines (similar to the way I mark my VIX charts):


I would expect this inflationary wave to be accompanied by similar upward rallies in oil (for which I normally use the etn's* DXO (double-long) for long and DTO (double-short) for short [the etf's DIG (long) and DUG (double-short) can be used indirectly, but they track the oil companies' equities] ... and also, other commodities, including agricultural commodities (soybeans (beans in the teens again?), corn, etc.), again moving inversely to a continuation of the weakening we've begun to see in the dollar.

For agricultural commodities, I like to use the etf DAG (double-long) to be long, and AGA (double-short) to be short - mainly keeping an eye on soybeans, but this etf tracks the agricultural commodities generally.

Later, toward the end of 2009 and into 2010, a "C" wave of such a large flat should carry gold back down to re-test its recent lows. This deflationary wave should also see corresponding moves down, again, in oil and commodities, accompanied by another move upward in the dollar. This multi-month wave may carry into 2011 at least.

Recap: Currently I am long gold, using DGP, and long oil using DXO*. I will go long agricultural commodites with DAG. For swing trading positions, I will expect to hold these long positions into early to mid-2009.

[*Exchange-traded notes (ETN's) are unlike exchange-traded funds (ETF's) in the way they are structured, and could carry more risk to the extent the underlying note requires a debt financing element. You can find more information via Wikipedia or other research sources. For now, during the time frame into mid-2009, I am expecting ETN's to continue to be tradable. After that, my concern about the financial sector will probably lead me to abandon ETN's and only use ETF's or other vehicles that seem safe (maybe during the subsequent deflationary wave, holding dollars (cash) will be just fine.]