Natural Gas Mean Reversion?

Over the weekend I tweeted that I liked Natural Gas on a closing basis above $2.75 and got a few questions asking for an explanation. Here is my reasoning.

As with any financial market prediction, a timeframe needs to be defined. I expect this trade to play out over the next 3-6 months and therefore, by my definition, it is not a long term investment.

A look at a 10 year weekly bar chart of natural gas with nothing more than a simple moving average and a momentum indicator makes it clear why this is just a trade.

Natural Gas Weekly

  1. The 200 week simple moving average is declining.
  2. Momentum continues to confirm new lows in price and recently hit oversold conditions.
  3. Prices undercut the August-September 2012 lows and closed higher to confirmed support.

It doesn’t take any fancy system or strategy to see that structurally, Natural Gas remains in a downtrend. With a downward sloping 200 week sma and a lack of any positive divergence in momentum, it is going to be difficult for prices to sustain rallies.

Continue reading

The Type of Setup I Look For: INTC

For those of you that follow my posts, you know that my analysis looks at five main things: absolute performance, relative performance, momentum, seasonality and sentiment. At any particular time, many assets will have a few of those things going for them, but I try to locate the assets that have all of those things working for them at once. In the case of INTC, I think conditions are setting up for a great risk/reward trade.

First off, with any stock that’s had a nice run over an extended period of time, I like to look at sentiment and seasonality to make sure that there aren’t any blaringly obvious headwinds to be aware of.

INTC Seasonality

Analyst Coverage (Yahoo Finance)
Strong Buy 6
Buy 14
Hold 19
Underperform 4
Sell 3
Total 46
Bears as % of Total 15.22%
Hold or Lower as % of Total 56.52%

Continue reading

Oil Update

With oil up roughly 24% off last Thursday’s intra-day low, many are wondering if oil has bottomed for good. Although I think that the action in crude has been constructive over the past few weeks, it’s important to put things into context and realize that a 24% move from intraday low to high, in four days, is clearly not sustainable. I’m going to use this post to look at what the factors I look at are saying about oil and explain what I think bulls need to see for this to really be the bottom.

First off, I’d like to provide some context to the underlying price action by looking at measures of sentiment and seasonality.

1. Crude is entering the best 8 month period of the year, with average returns over the past 30 years being positive in each of these months. 

2. Sentiment, according to sentimentrader data, suggests that pessimism in oil is at levels not seen since early 2002.

3. Commercial hedger positioning, though still net short 300k contracts, is off the extreme level of short 500k contracts that we saw in July of ’14.

Now that we know sentiment and seasonality are providing strong tailwinds for price, lets take a look at the weekly chart.

CL Weekly

Continue reading

Explore A Little

As far as I’m concerned, in college you’re supposed to do two main things:

1. Acquire enough marketable skills through coursework, internships, extracurriculars, etc… so that you have a number of entry level opportunities to choose from upon graduation.

2. Explore the various career paths that are available within your field of study so you can determine what you enjoy and would like to pursue upon graduation.

You’re also supposed to have some fun along the way, and I do, but I didn’t pay $28,000/yr to go on a four-year vacation. That’s just me though.

You’re probably thinking “This is a trading / investing blog; why are you bringing this up here?” Mainly because there are probably a lot of people my age in a similar spot and I think that sharing my current thoughts on my situation may help them.

For the past two years I’ve been gained exposure into the worlds of corporate accounting, investor relations, buy-side research, sell-side research, trading, consulting, wealth management, economic research, and a few other areas of business. I’ve liked trading and top-down technical research the most, by far, but I still have some reservations about pursuing trading or asset management as a career. What I’m getting at is, I graduate in 15 months or so and still am not totally sure what I’d like to do with my life. Indecisiveness happens, just ask anyone who’s ever gone to lunch with me at a restaurant with more than five items on the menu. It’s fine, most 20 year olds aren’t 100% sure about what they want to do, but what does that leave me to do right now?

Well, if anything, it tells me I need to continue to improve my marketability by acquiring new skillsets and figuring out what direction I’d ultimately like to go in by exploring a few more career paths through internships (i.e. the deals side of finance world or corporate finance roles).

As a result of my shift in focus, there will be a slight change in the types of content I create on this site.

1. I won’t be paper trading anymore as it’s too time consuming and isn’t as big a value add to me now that my goals have changed a bit. Also, having a short-term focus on markets is a drain on mental capital when the rest of my goals are long term in nature.

2. I’ll be adding content on fundamental analysis that will include posts on concepts as well as actual research.

3. I’ll be adding a new social media account on estimize to share my earnings estimates.

What won’t be changing is my focus on creating quality content to help you all better understand financial markets. Oh and the sarcasm, but that was a given wasn’t it?

The bottom line is; it’s okay to change your mind and not be sure about things, just make sure you learn from each experience along the way so that you can improve yourself a little more everyday.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.

Taking A Loss

One of the most difficult things for market participants to do is to admit that we are wrong and take a loss. We all know that one guy who has held stock XYZ since $100 as it spent years trading lower, only to find its final resting place in the single digits, or worse, delisted / bankrupt. Or that guy who moves his stop, or removes it altogether, because “the market is wrong”, only to end up holding a handful of worthless options at expiration (yes, I’ve been there). In hindsight, all of these actions sound absurd, but in the heat of the moment when emotions are flaring, it can be difficult to make the most appropriate decision.

So why is it that so many market participants go to such drastic lengths to avoid taking a loss?

Well, as human beings, we all deal with something called loss aversion. In its simplest form, loss aversion refers to the tendency of people to strongly prefer avoiding losses to acquiring gains. Now I know most twitter traders don’t have to deal with this type of situation, but for the rest of us, it is a frequent occurance.

loss aversion

Having a plan that addresses how you’ll handle taking losses, as well as any other scenario you can think of, is one of the ways to limit the mistakes that may be caused by loss aversion and other behavioral biases. If you’re comfortable with your trading plan, executing it should be almost mechanical in nature. The more specific your plan, and more comfortable you are with executing it, the higher the likelihood that you can avoid falling into the many psychological / behavioral pitfalls we are all susceptible to.

Continue reading