Plans, Audibles and Simple Charts - Part II
Go ahead, make my day!!
Yesterday I laid out my plan for the speculative / lottery positions I have in the QQQQ's. Today is my plan for two secular / core holdings.
The Russell 2000 (IWM) short is my core protection/speculative short position. It's made up of out of the money long dated puts purchased over the last year in scale. I have this position on based on the assumption that we are in a secular bear market that started in 2000, and has seen only its first (denial) down leg. Hence, this chart is on a weekly timeframe (all charts are through yesterday).
The plan here is to do nothing at least until we touch the first upward sloping trendline. There, depending on the where the volatility stands at that point, I may do a bit of "selling to buy." However, the key "restructuring" point for my position won't come until way down at the "thick" trendline, which coincides with a 50% retracement of the cyclical bull move that started in 2003. If/once we reach that point, I plan to roll down/out the puts, in expectation of a full retracement to the 2003 lows.
The corollary to the IWM core / secular short position, is my core / secular long position in the precious metals. . .with a twist. My long positions are made up of significant (for me) longs in individual gold equities. The reason being, as Prof. McGuirk has often explained, that I want to own the companies with the least possible hedges to the price of gold, i.e., that have not already sold forward their production. Looking at the weekly chart of the XAU little would worry me about my secular view, until and unless we were to decisively break the trendline in the $78 area. Yes, that's a long way down, but keep in mind that the 1987 crash was well within the context of a secular bull market in equities.
The twist with the XAU, is that it has been quite volatile recently, and certainly somewhat "spikey." Looking at the daily chart of the XAU, the plan here is to play a pullback to the 50DMA/Lower Bollinger Band/Trendline. I am doing this by being long mid-dated, out of the money, XAU puts, which I began buying in scale when the index punched through the 110 level. I have actually already started selling these puts - always in scale - with the intent of closing it out by the time we reach the trendline / and or an oversold condition. The XAU short is simply an opportunistic speculation - born of the speed at which gold stocks have moved up - against otherwise core holdings of the same nature.
Tying things back to the piece I wrote yesterday, please keep in mind that I am not trying to push the view that we are in a secular bear market for equities and a secular bull market for precious metals. I do believe that's the case, but we know cogent arguments can be made on both sides. Rather, I am trying to underscore the importance of having a plan of action for most positions, before "the going gets tough or the tough get going". Things often do not work out in favor of my plan, but at least I am prepared ahead of time for the losses or to realize the gains.
In Part III a couple of individual names, and some comments on my use of very simple technical analysis vs. rocket science type indicators.
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