SMSF Investment StrategiesSharing Simple Strategies for Self Managed Super Funds
Is the DOW in trouble?
Watching the stock market action in the past week for me has been more exciting than watching the Australian Open. The most “entertaining” market is none other than the venerable DOW (see chart above) which comprises of the 30 largest companies in the US. Just one day after making a new high, the index fell 500 points, wiping out 10 weeks of gains in just three days! Prices sliced through the 50 day moving average and the 6 month uptrend line like butter, even though these were strong support levels in previous pull backs. Recovery attempts in the past two days have been weak and it looks like there may be more down side action to come. For a more professional analysis of the DOW, do watch this free educational video done by Adam Hewitson, a veteran trader and founder of ino.com, a company that provides a number of innovative tools for traders and investors. I was recently invited to do a free trial of their products. I like a lot of what I see so far but I am still learning how to use the tools properly. I will write a blog post about it later when I have a better understanding of all the benefits of the products.
Of course this market action is even more exciting when you have positions that benefit when the market falls. As per our SMSF Investment Strategy, we run our SMSF more like a hedge fund and employ investment methods that enable us to profit in all market directions – up, down or sideways. I have been bearish for some time now, and have recently discussed some bear market strategies that we use in my Jan 15 post. Shortly after writing that post, I bought some call options on SKF, a double inverse ETF which tracks the financial sector index inversely. These calls are showing a 50% unrealised profit at the moment. The long option position benefited from both price move and increase in volatility, which affect the pricing of options. As I am expecting more down side near term, I will hang on to these and roll the calls down (sell the calls and buy calls at a lower strike price) to lock in profit later when I expect a bounce. The timing for this trade was perfect, but I cannot take credit for calling the market reversal. This market call was made by Robert Prechter of Elliott Wave International. I have been a very satisfied subscriber of their publications since October 2009. In the latest publication of The Elliott Wave Theorist, he called for a top in the DOW on Jan 14-15. He was off by a couple of days as DOW actually made a top on the Jan 19, but hey that is close enough for me. Below is a video of an interview with Robert Prechter on Bloomberg on 11 December 2009. As mentioned in the interview, he is not expecting a mere correction but another leg down of the crash which started in October 2007. When he said this, markets were still making new highs, amidst all the talk of recovery, and another leg down was quite unthinkable. After what has happened in the last week, it does not seem so implausible anymore. Download this free investment report if you would like to know more about what he said to expect for 2010.
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