Allan is an old friend who has been developing and trading a "Trend Following" system. You can read more about it at "Can You Trade a Chart Like This? (Click here for a risk free trial.)
I've assembled some of his recent ideas, including his speculative trade for 2012, which he mentioned in his weekend update.
Here are several examples of his current signals and thoughts. ~ Ilene
Weekend Update (March 10, 2010)
New Signals
VXX Daily——–> SHORT – note: Allan's daily signal is for a short on the VXX. But his trade for the year is going long VXX calls.
IWM Weekly——> LONG
XLF Weekly——-> LONG
Speculative Trade for 2012
In early July of 2011 the markets appeared as they are now, in stubborn up-trends despite the mounting bullish sentiment and relentless, yet limp-wristed rallies that were all but untradable. As George Costanza did in a famous episode of Seinfeld, I started doing the opposite. I began the accumulation of VXX December calls, a bet that just two months later was up over 500%. Based on historical patterns, the market declines even in a bull trend 2-3 times a year and usually in a sharp, steep, fast sell-off that is accompanied by a spike in volatility and a spike up in VXX. I didn’t know when, but I was pretty sure such conditions were coming and coming soon.
Fast forward to March, 2012. I have begun the same trade with the same expectation of market behavior. As you should know by now, this is the opposite of the philosophy of trend following. I am deviating and sharing the trade this weekend because the gains were massive last year and I expect they will be just as massive this year….not a guarantee, just an expectation and there is a possibility it will not happen at all, or not happen in the next six months. But I think it will.
I have started accumulating VXX September calls. That gives the market about six months to suffer a steep, volatility spiking decline. It does this usually 2-3 times a year, even in the midst of a three-year bull market. Imagine what would happen if a bear market took over the next few months. During last year’s 13.8% mid-year decline, VXX went from the low 20′s to 60.
VXX closed on Friday at 23.17. I’ve been buying the September 25 calls between $4.50 and $5.00. If VXX spikes again this year, even to 50, these calls will have the intrinsic value of $25.00. Again, this is not a guarantee, it is only my off the cuff analysis and just because it worked last year doesn’t mean it will work again this year. But I think it will.
Below is a screen shot of the September call options on VXX. They are for the most part, thinly traded which makes for relatively large bid-ask spreads, but they pale in comparison to the gains if this gamble pays off:
[Click on charts to enlarge; clicking on the screenshot below will take you to a more recent page, the screenshot is not very clear]
September VXX Calls
As you can see, there are plenty of strike prices above and below 25 that will work with the assumptions underlying this trade. The Sep 15 calls, which could be bought for about 9.00, would have less then a single point of time premium in them for the next six months. The 18′s, 20′s and all of the strikes up to 30 all look good to me this weekend as increasingly aggressive ways to bet on a spike in volatility in the coming months.
VXX Hourly Trend Model
VXX Hourly signals are triggered by price moving above or below a price threshold generated by a trend following algorithm. Trading these signals at that price instead of at the close of the bar (as we have been doing) results in significantly better entries/exits and is making such a big difference in profitability. It is worth an effort to implement this change for those of us who are trading the hourly model. Without the end of bar “confirmations” these trades need to be managed a little differently, with a tight stop if the trade is not confirmed. I should have the mechanics worked out by Monday. If it results in a substantial increase in profitability, we need to be trading it that way. More in the week ahead.
TRENDS TABLE for March 10, 2012
CME – March 12
CME Daily Trend Model is very close to reversing SHORT. This has been one of our better trading models over the year. A close below 270.19 will trigger the Sell. CME is currently at $276.55.
TLT/TBT – March 14
We follow TLT (Barclay’s 20-year Bond index) in the Commodities portfolio and is in the midst of a very profitable SHORT trade. It’s inverse is TBT, that seeks to achieve the inverse return of Lehman’s 20-year bond index. In other words, TBT is a play on higher interest rates. (See also Bruce Krasting's Is the Ten-Year going to 3%?)
With today’s Open, TBT, in addition to being on a LONG, has broken out of its trend regression channels. You can see the breakout just above the top channel line:
TBT Breakout
TBT is a good way to play the SHORT on TLT, which as you can see, has broken down out of its channel.
Learn more about Allan's "Trend Following" system here.
Click this link for a risk-free trial.
