Joel Elconin
Joel’s introduction to trading was in the Standard and Poor’s 500 Index futures pit at the Chicago Mercantile Exchange. During his time at the CME, he was involved in Index Arbitrage as well as trading foreign currency futures and options. From 1994-1999, he was a proprietary trader for Olde Discount Corporation. Following his tenure at Olde Discount, he founded the Detroit office of Bright Trading, LLC. Since 2003, Joel has been an independent trader researching and developing proprietary indicators and trading systems for the equities and futures markets. In 2007, Joel joined JC Trading Group as a Market Consultant and trading supervisor.
Posts by Joel Elconin
Warren Buffett: Deep Pockets and Sweet Deals
0May 16, 2012 - 11:18 am
by Joel Elconin
in Articles
As any seasoned trader can attest to, trying to pick bottoms in stocks can be very dangerous to one’s trading account. With today’s disclosure of Berkshire’s new position in General Motors (NYSE: GM), Warren Buffett appears to be trying to pick a bottom in GM. Many traders try to mimic Warren’s moves, and with the stock up over 4% today, there is no doubt there are some traders doing just that in GM today.
However, traders should use caution when following Mr. Buffett because his investing style is certainly not for everyone. Although a majority of Mr. Buffett’s investments have worked out handsomely, some of them did so because of his deep pockets and often preferred investor status. For example, when Mr. Buffett stepped up to the plate in Goldman Sachs (NYSE:GS) in September of 2008, he did so with preferred stock that had a juicy 10% dividend and warrants to buy $5 billion worth of common stock at $115 a share, $10 below Goldman’s share price when the deal was announced. But just a few months later Warren was down significantly on this investment as on November 21, 2008 GS traded as low as $47.41/share. Most individual traders cannot afford to lose that kind of money on a trade, especially if they trade on margin. But Warren has very deep pockets and can therefore take more heat than the average trader can.
Mr. Buffett’s investment in General Electric (NYSE:GE) in 2008 was accompanied with preferred status as well. He received preferred stock with a 10% annual dividend and warrants to buy GE common at $22.25/share. Any trader that followed his strategy and bought similar long term warrants in October 2008 has yet to see any gains from those warrants, as GE has only traded up to 21.65 since that date. But Mr. Buffett is long out of the trade as GE has redeemed his preferred stock giving Buffett a nice profit despite his warrants being out of the money. If any trader had interpreted Buffett’s purchase as a buying indicator for GE stock, they would have been under serious water five months later as the stock traded as low as 5.73 in March of 2009. Again, most traders do not have deep enough pockets to take that kind of heat.
Which brings us to Buffett’s recently highly publicized investment in Bank of America (NYSE:BAC). Once again, he received preferred stock at a 6% annual dividend and warrants at 7.14 (in the money as of today). When the news hit the tape of his purchase, BAC shares spiked up to 8.80, only to fall under 5.00 by the end of year. It once again takes deep pockets to be able to stomach those losses.
Mr. Buffett rarely discusses the risk parameters associated with his investments, although he does employ diversification in his investment strategies. Unfortunately, the average investor does not get the “sweet” deals and must have a modicum of risk management.
Deep pockets also gives Buffett the luxury of adding to a losing position. This is something a trader should never do. Although many traders have reaped large profits from this mor-on strategy (put more and more on as it goes against you) there is larger amount of retail and proprietary traders who have been destroyed doing this. Therefore, it is of paramount importance as traders to have your risk parameters well defined. Using some type of mental stop is critical in protecting one’s trading account. Chances are if the trade goes against you and you are stopped out, you may have another chance to get back in, and most likely at a more favorable price than your original entry price.
The bottom line is that if you do not have access to the “sweet deals” and do not have deep pockets, you must incorporate sound risk-management skills into your trading style. So if you are following Buffett’s purchase in GM today, make sure you have a contingency plan in place if the trade moves against you. By employing sound risk management into your trading, you’ll be a better trader and one day you may have deep pockets like Warren Buffett.
S&P Weekly Outlook
1May 13, 2012 - 6:05 pm
by Joel Elconin
in Articles
Open mouth, insert foot. Last we heard from Jamie Dimon he was preempting the Federal Reserve Bank and announcing JP Morgan’s (NYSE: JPM) dividend hike following the stress test results. And now he pulls this zinger. After complaining of restrictive policies towards the banking industry, Mr. Dimon, has given all the Volcker rule proponents some major ammunition as he sinks into a “whale” of a trade. Furthermore, notice on the chart how JPM began to top out at the end of March, coinciding with the discovery of the problem (curious to see if there was any insider selling during that period).
All those folks that followed the herd into JPM after the dividend hike are now seven points underwater with little hope of getting back to even in the near future.
I do not want to go all “Black Swan” on you, but this is unerringly similar to how the banking crisis started in 2008. A bad loan here, a bad loan there, KABOOM, down goes Bear Stearns, Lehman Brothers, Wachovia Bank, Washington Mutual Bank, Fannie Mae, Freddie Mac, American International Group (NYSE: AIG) and Merrill Lynch (for all practical purposes). I’m not saying that we are going to have another financial crisis, but risk management is obviously still an issue in the banking sector.
Enough of this pessimism, that is not what you readers want to hear. How about how well the market held up on Friday? After opening near the overnight lows, the market rallied and posted a modest loss on the day. A while ago, I was discussing the all important level of 1400 in the June futures. Now that level has moved down to 1350.00 (Friday’s close). Although the index rocketed up from this level in early April (aided by a strong earnings season), now the market is just sitting here. And with Friday’s nearly matching highs and lows, a big move is on the horizon. If we can clear 1364.00, all is well and we may move back up to 1400. However, if 1344.00 is taken out, the weekly low 1339.25, will be just a resting stop for the move to 1300.
Apple (NASDAQ: AAPL) rallies are certainly not what they used to be, but neither are the breaks. Not sure if this makes any sense or not, but on rallies it “feels” like the stock is being sold instead of being bought. In other words, the stock for sale is increasing the higher the price goes, and when the momentum and High Frequency Traders are done racing ahead of these orders, AAPL flops right back down. Similar to the June futures, AAPL is winding up for its next big move. After trading in a measly 17 point range last week, AAPL needs to clear 576 to rally. Look out below if 560 is taken out.
Exxon-Mobil (NYSE: XOM) paid out its hefty dividend this week and held its ground. Investors that missed out on all the opportunities above 87 to get out, have lowered their expectations to 84. Even though XOM made a high on Monday at 84.79, it struggled at 84 for the remainder of the week. Until XOM can get back above and hold that level, expect continued weakness. On the downside, if the double bottom from Thursday (82.55) and Friday (82.54) does not hold, XOM may find itself trading in the 70 handle for the first time since mid-December.
International Business Machines (NYSE: IBM), what a gnarly issue. If one does not sell it when it is going straight up or buy it when it is going straight down, good luck, IBM is devoid of any true liquidity. To be honest, if I was a fund manager with a large holding in IBM, I would be seriously considering lightening up, if IBM keeps dancing around 200. And that is exactly what is happening, with three of the last four lows between 199.72-200.02. IBM needs to get away from this level now. Obviously, some fund is thinking about this already and targeted the 203 level as an exit point evidenced by the triple top at Tuesday (203.06), Wednesday (203) and Thursday (203.25) highs. Look for a decisive move in IBM once 203 is taken out on the upside or 200 on the downside (on a closing basis).
After flirting with the 30 level, Microsoft (NASDAQ: MSFT) staged a nice rally in an attempt to fill the gap at 31.61. However, it was turned back late in the day and closed over 31 (31.16) for the first time in five trading sessions. Since making a 52 week high at 32.95 and making another solid attempt at a new one post earnings, MSFT has been on the decline. Since 31.50 is smack dab in the middle of the recent high (32.95) and recent low (30.10) which coincides with Friday’s high (31.54), that will be the level to focus on for the week.
General Electric (NYSE: GE) is doing its best to hold 19. After dipping to 18.74 on Wednesday, GE recovered to close at 19.01 on Friday. Since early April 18.70-19.95 has been the trading range and as of late GE has been spending a lot more time near the bottom of the range. I am not sure there is anything to shake this issue out of its doldrums barring a major rally or sell off in the overall market.
What a quiet week for Chevron Corporation (NYSE: CVX) trading in a narrow 3 point range for the entire week. So is it consolidating to move higher or lower? If the double bottom from Thursday (102.65) and Friday (102.47) cannot hold early in Monday’s session, the weekly low of 101.37 will surely be tested. After that, looms the recent low of the move at 100.51. To reverse the sell off from the all time high of 112.28, CVX needs to take out the weekly high of 104.24 and stay there.
AT&T (NYSE:T) is the place you wanted to be, (at least for last week it was). Riding the coattails of an upgrade on Friday, T made another 52 week high in a down market. From the gap open over the former 52 week high of 33.33, T made an assault on the institutional sellers at 34.00. However, the HFT crowd thwarted the attempt, selling ahead of the monster orders at 34 in the high 33.80’s before topping out at 33.92. From the close of 33.59 and up to 34.00, should be resistance until the HFT players are finished feasting on the size. On a pullback, expect only minor support at Friday’s low and major support from 32.71-32.94.
Procter&Gamble (NYSE: PG) shrugged off a Wells Fargo downgrade on Monday and spent some time in the 64 handle. Unfortunately, after peaking at 64.50 on Monday, PG fell back to settle at 63.68. PG, which has been unable to recover after its earnings miss, closed just above major support at 63.29. The next minor support levels for this issue would be the low for the year at 62.59 and 61.63, with major support at the late September low of 60.30. On the upside, PG needs to crack 64.50 for any chance to fill the gap from 65.26-66.63 following its disappointing earnings announcement.
Is it possible that a large fund or investor is trying to unload their Johnson&Johnson (NYSE: JNJ) stake at 65. I think so, as all five highs for this week were from 64.86-65.02. Back in the old days, all you would have needed were a few sizable bids from 64 3/4 to 64 15/16 and that was that. Now that any sizable bid or offer gets subpennied (for 100 shares) and traded against, disposing of large positions has been much more difficult. Following a weak close on Friday at 64.34 after making a low at 64.23, JNJ will not find support until the mid-April lows from 63.20-63.36. Need I tell you where the major resistance is at?
You heard it here first, both Warren Buffett and the company itself, Wells Fargo (NYSE: WFC) are buying stock in and around the 32.50 level. In fact the last four times WFC has reached that level a rally followed shortly after. Even the JPM debacle could not carryover to WFC as it again rebounded off that level and traded straight up over a point. Now who can predict what will happen the fifth time it gets there, but be prepared for a major move one way or another. Since its positive earnings announcement WFC has traded between 32.43-34.30, and as of late has been challenging the lower end of this range. But support is support until it is breached and if 32.50 if taken out, that level could turn into major resistance.
In closing, the June S&P 500 futures along with a majority of the top ten components are clinging to major support levels. If these levels hold, the correction is over and we can all breathe a sigh of relief. If not, batten down the hatches, as sell in May and go away may still be the play. Keep in mind, Thursday’s and Friday’s action in the futures as well as the individual issues discussed in this week’s action will determine what level is next 1300 or 1400 for the June S&P 500 futures.
Facebook IPO – Time to Press the “Like” Button?
0May 11, 2012 - 10:39 am
by Joel Elconin
in Articles
I do not have a Facebook account, but I am familiar with some of the lingo, and if this stock opens near the price of the IPO, I’ll be pressing the “Like” button.
At this time, the IPO range for Facebook (NASDAQ: FB) has been set at 28-35. If my broker called me up to buy stock at 40, I would say “how much can you get me?” In my opinion, if it opens at the projected range, it may trade much higher for several reasons.
Reason # 1: The Float is Low
I do not care what the “Street” says, the float on this issue is low. With the number of shares they are currently offering, chances are there won’t be enough supply to meet demand which means the stock could have a wicked rally immediately following the open. With only preferred investors able to participate in the initial offering, there will be huge retail demand in the secondary market.
Reason # 2: Cheap Price Relative to other High Flyers
I mean who wants to miss out on the next Apple (NASDAQ: AAPL), Google (NASDAQ:GOOG) or Priceline (NASDAQ: PCLN). As a result of their ridiculous prices and illiquid markets, there is very little retail interest in those issues. Why buy 100 shares of Apple when you can buy 1000 shares of FB for a little more than half of the amount? The company is attempting to price the IPO reasonably so that it’s users can participate in it’s anticipated growth. The arrogance of Apple, PCLN and with GOOG (recent 2 for 1) not to split their stock is akin to telling the retail investor that they are not worthy of owning their stock.
Reason # 3: Interest in Product = Interest in Stock
Along the lines of the retail investor mindset, how often have you purchased the stock of a company simply because you like their product or had a really good meal? To be honest, I have on a few occasions, but my preferred strategy is to short companies with poor customer service or if I am served a terrible meal. But with 500,000,000 users and growing everyday, that love for the product (many are addicted to it) will inevitably drive initial demand for the stock. It is hard to fathom that some Facebook fanatics won’t take some of their cash from under their mattresses and buy this stock, thinking they can retire off this issue.
Implications for the Overall Market
Many retail investors have been on the sidelines for the majority of this year’s rally. Those same retail investors need some type of catalyst to get them back into the market. The Facebook IPO may be just what the doctor ordered. If the price of Facebook soars in the first few trading sessions, this could driving a media frenzy, which could be just the type of catalyst that is needed to drive interest back into the overall market.
Affect of Wells Fargo Downgrade on P&G, Not much.
0May 7, 2012 - 9:13 pm
by Joel Elconin
in Articles
How much stock can you put into the upgrades and downgrades of individual issues by Wall Street analysts? Well it depends how you use the information.
For example, Well Fargo downgraded Procter&Gamble (NYSE:PG) this morning, noting that the company lacks near-term catalysts and they cut its earnings estimates through 2014. WFC lowered its price target range from $67-71 to $64-67.
As a result, PG traded down almost a point on very little volume compared with the average daily volume of the stock. PG made a premarket low of 63.32 just before the open, and just above major support at 63.29. Low and behold when PG opened on the NYSE, PG never even traded below the premarket low nor the critical level of 63.29. From there, PG has gone straight up and is poised to test the double top from last week at 64.75-64.76.
How should traders and investors interpret such actions from Wall Street’s brain trust?…very carefully. First and foremost, do your homework and be cognizant of the price action of the issue in question relative to the more reliable data points derived from the daily sessions. Obviously traders looking to cover shorts or initiate longs in PG capitalized on this opportunity to buy PG on major support and stepped into action right off the opening bell.
Longer-term WFC may be correct about the long-term direction of PG. However, before acting on upgrades and downgrades of Wall Street analysts, gauge how their actions fit into your own assessment of the issues (technically and fundamentally) and act accordingly. There longer term declaration for an issue just may provide you with a profitable short or long term trading opportunity.
Weekly S&P Outlook – Not a Pretty Picture
0May 6, 2012 - 2:12 pm
by Joel Elconin
in Articles
A common phrase on Wall Street is “buy the dip”, which over the years on many occasions has been prudent investment advice. On the other hand, no one ever harkens “sell the dip”. But maybe they should be in this case. From a technical perspective, this market is not looking good at all with a potential head and shoulders top developing right now.
All the market needs is a hiccup in Europe and the S&P 500 Index futures will be right back at 1300. If the stellar earnings season did not drive the market to new highs, what will? For the time being, this is still a MINOR correction until 1352.50 is breached in the June futures. Once that happens, say hello 1332 and then 1300. On the upside, 1400 is getting farther and farther away, not to mention the high of the move at 1419.75.
And what stock is leading the charge on the downside, the same one that got us here in the first place, Apple (NASDAQ:AAPL). It should be interesting to see what Wall Street analyst who upgraded AAPL in the 600’s comes out from under his/her desk and downgrades AAPL in the 500’s (while it is still there).
The chart for AAPL is ugly and whoever tells you otherwise should not be trusted. Closing just off the low after a steep selloff is recipe for disaster. Once Ma and Pa read the weekend paper (guess I am show showing my age), they are going to ask “what the hell happened” and scream “ get me out”. Therefore, with 555.00 (April 25th low) being only 10 points away, expect your first wicked bounce at that level. Longer-term, AAPL needs to get back and hold 600.00 to stay on course for the rally to resume.
For a textbook description of resistance, check out the Exxon-Mobil (NYSE:XOM) chart.
Getting over 87.00 for this issue is similar to a “death sentence” as large investors (aided by High Frequency Traders) have unloaded their positions ahead of the 52 week high of 88.13. For now, Friday’s low (84.40) is crucial support for XOM and if that level is breached, we could see 82.00 (just ahead of the April 10th low of 81.88).
After rocketing back from its post earnings swoon International Business Machines (NYSE:IBM), gave some of it back on Friday. Finally, the persistent buyer in the mid 206’s got out of the way and a pullback was on. It is difficult to predict where the decline will end because of the steepness of the rally, and the real estate between the lows of the rally. Therefore, do not be surprised if IBM slips back under 200 again and tests the low of the move at 196.79. On a rally, there is going to be a lot of stock for sale from the mid 206’s up to Friday’s high at 207.11.
Microsoft (NASDAQ:MSFT) is in full retreat from its 52 week high of 32.95. After failing at that level on the post earnings rally it seems as though they never had good earnings to begin with. This issue traded in a 0.50 cent range for six days before breaking down. Therefore, the February 15th low of 30.03 (coinciding with a nice round number like 30.00) could come into play this week. Also, the 31.80-31.90 (old support/new resistance) will curtail any rebounds for this issue.
Not much stands between Friday’s low of 19.25 and the major support of 19.00 in General Electric (NYSE:GE). This issue did not even close to matching the March high of 20.36 after a favorable earnings report. As stated numerous times in my Weekly Outlook, there is too much overhang in this stock and when coupled with High Frequency Traders detecting any sizable seller, it is nearly impossible for this stock to have a sustained rally. If the support under 19.00 is breached, look for 18.70 (April 10th low) as the next area of support. On the upside, look for a mound of resistance at the 19.50 level, which held as support until Friday.
Chevron Corporation’s (NYSE:CVX) break out over 107.00 turned into a fake out by week’s end. After struggling at that level for three days in a row last week, CVX cleared it on Tuesday and rallied to 108.79. However, the much lower open on Wednesday caught traders off guard and for the remainder of the week sellers were forced to whack the miniscule bids on the breaks in order to exit their positions. If the weakness continues, major support stands at the April 12th low of 100.51. Expect resistance at all the whole numbers from 105.00-107.00 as savvy traders will attempt to exit CVX on the upswing.
AT&T (NYSE:T) was not very comfortable in the 33 handle, a level not visited since September of 2008. Although T managed three closes above 33, profit takers on Friday forced T to close just off its low of the day at 32.86. Expect sellers to resurface at 33, just ahead of the triple top (33.11, 33.15 and 33.17) and the 52 week high of 33.33. At this time minor support can be found at 32.50 and look for a test of the previous 52 week high (31.97) if the selloff gains momentum.
Procter&Gamble (NYSE:PG) recovered a bit this week from its disappointing earnings announcement. After forming a triple bottom (which PG often does) on Monday (63.29), Tuesday (63.29) and Wednesday (63.40), PG attempted to get back into the 65 handle. However, sellers came in to form a double top on Thursday (64.76) and Friday (64.75). PG may be in for a bit of a consolidation phase before this issue tries to fill the large gap (65.26-66.63) on the upside or crack the triple bottom and march towards the November 25th low of 61.00.
Another member of the Big 10 that closed weak, along with the market on Friday was Johnson&Johnson (NYSE:JNJ). JNJ which has been on the upswing since bottoming at 62.76 on April 19th finally ran into some major resistance. High Frequency Traders detected large sellers just under 65.50 (weekly high 65.49) and used it as cover to beat JNJ back down under 65 and close at 64.74. Monday’s open will be crucial for JNJ, with 6 of the previous 7 lows being between 64.68-64.84. JNJ needs to pop off the hop or it will begin to surrender its gains coming off the 62.76 low.
Well Fargo (NYSE:WFC) which has been range bound from 32.43-34.30, since its favorable earnings announcement, is started to lean on the lower end. And if the current low of the move at 32.43 cannot hold up, it is not going to be pretty since the next major support level is not until the March 13th low of 31.58. Of course the way WFC trades, it may take a week to get there, but it is still an important level to be cognizant of. Although WFC traded above and closed above 34.00 on Tuesday, major resistance stands at the double top from Wednesday and Thursday at 33.79.
In closing, I apologize for such a bearish slant on the markets this week. But honestly it was to be expected when the June S&P 500 futures failed at 1400 again, AAPL is tanking (after blow-out earnings), and the index closed just off the low of the day and the week. However, until 1352.50 (April 10th low) is breached the “buy the dip” crowd can still argue that the correction is over and new highs are on the horizon. But unless the index can turn around on a dime off Friday’s low and rally, there will be plenty of more dips to buy in the coming weeks. Until the “buy the dip” crowd says “sell the rallies”, it may be best to sell in May and go away.
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