Giving the Fisherman His Due

I hope everyone had a great holiday season!

This post is about giving the fisherman his due. On Thanksgiving Day, the La Jolla Fisherman called the Santa Claus rally. I demurred. Well, Christmas came and the S&P 500 Index had gone up from the 1176 to the 1257 level. That's a Santa Claus rally. I tip my hat to the Fisherman. Well done. I am also pleased that we in the TSP Club went long the C Fund @ 1215 and exited @ 1240.

Some bloggers are reluctant to tip their hat to a good call. I'm not. Maybe, some day I will run into the La Jolla Fisherman again and we can swap market tales over Alaska salmon.

What are my thoughts tonight about the market?

Today was a low volume day. Most major traders are away for the holidays. As a result, there just isn't much activity going on. It is noteworthy that the S&P 500 Index has stalled out at 1257. I view the 1257 level as a serious resistance level. I do not think the S&P will smash through this level on the first attempt. It is also interesting that the trend of volume has been down since the beginning of December. This means that higher prices are no longer supported by volume. It is not a good time to buy. Better buying opportunities are ahead of us in January, I suspect. I have been looking at the December 1990 stock market as a rough model for what might lie ahead. Similar to December 1990, the market surged up this month and then stalled out in the final week of December at resistance. What followed December 1990 was a sharp decline into support by January 14. History doesn't repeat itself but human behavior never changes. I will be looking to see whether resistance @ 1257 produces a decline into January 14 next year.

Do I have any open positions at this time?

Normally, 75% of stocks follow the general market. So, if the S&P 500 Index has stalled out, most stocks will stall out as well. There are exceptions to this rule, however. I am reluctant to talk about individual stocks because one must be careful and cautious, particularly when a stock is bucking the market trend. One stock that has intrigued me since the summer is REE, a rare earth element stock. The stock has gained 1,000% since July 1. Any stock that rises that much catches my attention. I also noticed that the uptrend remained intact despite a 2-month correction. This pattern immediately said to me that REE might go much higher. I also noticed that the MACD line was trending upwards, that the MACD Histogram reading was turning positive, and that the slow stochastics lines were all pointed upwards. I became convinced that I should take a position. For confirmation that a position would be a smart move, I checked out the seasonal cycle and whether the speculative community was hot on the stock. These items also checked out with REE.

Last Wednesday (December 22, 2010), I purchased January 14 calls on REE for 0.10. I was fairly confident that I would see a profit. After years of investing and trading, one can sense that a stock is headed higher based on clues like support holding in an uptrend, MACD lines turning positive, MACD Histogram turning positive, slow stochastics pointed upward, seasonal cycles, speculative chatter, etc. REE closed down on Thursday, December 23 but I saw this as a harbinger of higher prices ahead. (Down days are great times to buy in an uptrend) My January 14 calls closed @ 0.10. No change. Today, REE broke out of its trading range and made a high of 12.05. My January 14 calls traded as high @ 0.35 before closing @ 0.24. REE should go much higher this week and, probably, make a final thrust higher on the first trading day in January 2011. I plan to close out the trade on the first trading day in January 2011. My thought is that REE might go as high as 17.50 - 21.00 by the first trading day in January. This price target would make for a nice profit on my January 14 calls.

Note that I am ever flexible. Even though I believe the general market has stalled out at 1257 and I am happy to be 100% in the G Fund, I also recognize that a minority of stocks may still present opportunities. REE is an opportunity this week. The price is going higher.

Here's to the fisherman and a jolly good call,

Wink

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