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goldseth (< 20)

Don't be a PIG!



April 14, 2009 – Comments (0) | RELATED TICKERS: CHK , JOY , RIO

Pontificating on the market’s current impressive rally, some experts are calling it the start of a new bull market while others maintain it’s just a bear market rally. Bull, bear…I don’t care, I just won’t be a pig! Time to lock in some gains.

Coming off an extended holiday weekend (market closed on Good Friday) into a week that includes tax day, the deadline for 2008 IRA contributions, Goldman Sachs earnings and options expiration, I expected Monday to be a key trading day. At the end of the day, the market did finish higher and was buzzing with optimism as the Wells Fargo and Goldman Sachs results seemed to fuel speculation that the stimulus was beginning to take effect. I suppose there is some merit to that perspective, but I think that view is fixated upon the short term while ignoring other long-term issues yet unresolved. Furthermore, I was disappointed with the technicals, so in the end, I’m preparing for a correction.

Taking a look at the chart below, this rally showed signs of weakness with the March 23 attempt to set up support of the 50 day moving average. While this run continued with higher closes on ten of the next fifteen trading days, the volume seemed to dry up as we approached the longer term trend. For fans of candlestick charting, April 13th’s trading may have been the confirmation I needed. While not a classic doji or spinning top, it illustrates the indecision in the market…and more importantly, a lack of conviction.

Time to sell into the rally?

In my opinion, this rally simply reflects that many great companies with solid fundamentals were oversold, undervalued and ripe for the picking. Many traders and investors decided to jump in at these prices, but with a 25%+ gain off the bottom, I would also expect plenty of profit taking! This profit taking combined with the general market indecision may provide another test of the bottom or set up a sideways channeling pattern.

That considered, I think it would be wise to take profits here or start hedging with covered calls or put positions if you haven’t already.

My recent purchase, Yanzhou Coal Mining Company Limited (YZC), is up over 25% already, so I’m just looking to hedge at 10-$12.50 as the stock tests $10. Navious Maritime (NM) is more of a trade candidate than an investment, so given the huge run in the last 2 days, I may sell near $3.00 and revisit my next shipping move with NAT or DSX. Frontier Oil (FTO) is trading under the strike price, so hopefully they’ll expire and I’ll sell another round for May. After gold’s retreat from $1000 last month, I closed my Yumana Gold (AUY) hedge for a 50% gain. This stock IS my hedge against stocks, so I’ll leave it that way unless gold runs up again. With the great performance of CHK, JOYG and RIO, my short calls are now in the money, so if we have a nice correction, I may buy them for a gain back rather than risk getting called out, but until then, I’m going to let them ride. I closed my loser position in E-Research Technology (ERES). Being down almost 35% at one point, I was happy to get out with a 12% loss!

Bottom line…its time to lock in some of these gains even if at the risk of missing some upside. Nobody ever got poor taking profits!

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