Portfolio Review for Week Ending 1/13/2012

It was a bit of a whipsaw week for the model portfolio.  As this remains somewhat of a pilot initiative, I am still working out some level of balance between taking action when it seems warranted and focusing on actions where as much advance notice can be given to subscribers.  As a consequence, we took some action with little notice and at the same time exited some positions which might be OK to hold in order to ensure that we could get the work out.   As we go forward I willll continue to work on the right balance.  Let’s review what happened.

On Tuesday we sent out an alert that the model portfolio would be opening a short position in the E-Mini S&P 500 futures.  Our Elliott Wave analysis suggested that the index itself could be putting in an ending diagonal pattern.  This pattern has specific limits on where prices must end.  By breaking above the October 27th high, the index indicated that it could be near the end of the pattern and the maximum achievable price consistent with the pattern was relatively nearby.

Even though we were uncertain about the pattern, the portfolio would be able to exit with a controlled loss should a different wave structure materialize.  This gave a reason to act without the typical confirmation one looks for to support a change in trend.  In this case it seemed to be a risk worth taking.  Since the events which presented the trade opportunity occurred just after the open, we took the position without advance notice.  Although higher prices were eventually seen, they did not extend beyond our stop loss level, and we were able to remain in the trade when prices fell sharply Friday morning.

The sharp decline was consistent with the wave pattern we had been looking at.  However, the subsequent bounce was less so.   It overlapped prior swing lows in a manner that suggested the decline might not continue until after another new high was seen.   To be clear, it didn’t invalidate the pattern but it reduced the odds somewhat.  Therefore we lowered our stop loss on on half of the position and were taken out for a net move of +6 on the one half.

If U. S. equities continue to decline then the portfolio is setup to participate.   If the S&P 500 makes new highs first and stops us out then our partial profits won’t be sufficient to prevent the overall position from being a net loser, but we will have mitigated some of the downside.  We still anticipate a significant decline in U. S. equities and unless they start to show a more constructive pattern we will continue to look for additional entries.

Our position long IBM puts is our other exposure to being short U. S. equities.   It is much further off its highs than the indices.  The stock continued down this week and remains consistent with our previous analysis.

We lowered our stop loss order in Sugar on Friday and again were taken out.  Again for a modest profit, but far less than we were looking for.  The sharp decline just after we entered the position still supports the idea of further weakness and Friday’s strength could merely be the end of a correction before turning back down.  However, it was a stronger move than we would like to see.

Folk wisdom in the futures pits holds that any strong move on a Friday has a pretty good chance of continuing.  If someone is willing to take a action before the weekend then they likely have conviction.   That should be even more true leading up to a three-day break.  Sugar can be prone to some rather volatile moves so the ability to exit for some profit was more attractive than the risk of a strong gap up Tuesday morning.

If sugar gaps down then we’ll be on the sidelines watching.   If the pattern continues to hold promise for more selling and there’s an attractive entry then we’ll see if it makes sense to re-establish our short.

We are stalking possible setups in several commodities including cotton, corn, and soy. These might take several weeks to mature and we’ll review them in more detail if they appear to hold promise of imminent trade setups.

The Managematics Model Portfolio is a fictitious portfolio managed to demonstrate trading techniques which may be used to trade a speculative account. It is for education purposes only. Nothing related to the portfolio should be interpreted as a recommendation to buy or sell any security and the general techniques employed may not be suitable for every individual. Past performance of these techniques or this portfolio may not be representative of future results. The results shown may vary from actual, live trading results which are subject to live market conditions.