Thinking ahead for short-term trades

Short-term, the current stock market rally has already been fast and furious. I am now starting to think about protecting profits for my short-term trades (i.e. FCX, UYM, SSO, and URE). I think the top to the current "sub-leg" of this countertrend rally will be in before Christmas (it could even happen this week if things get too overheated too fast), then a 2-6 week mini-correction, then a good bull run out to March or April to finish the intermediate-term rally. I am going to try to game the anticipated mini-correction for a few weeks within the intermediate-term rally, then I'll probably buy many of my current short-term bull plays back in January.

The current short-term rally that began at the end of November for most general stocks has been led by two of the most beat up and fundamentally terrible sectors: banks/financials and real estate. How's that for stock market logic and investing based on fundamentals? I follow the $BKX (Philadelphia banking index), $DJUSFN (Dow Jones U.S. Financial index), $DJUSHB (Dow Jones U.S. homebuilders index) and $DJUSRE (Dow Jones U.S. commercial real estate) indices.

Below, the financials ($DJUSFN):



The Homebuilder's index ($DJUSHB) is leading the pack up and blasted thru its 50 day moving average already:



I have decided to trade the expected upcoming temporary spike down by using SRS, which is a "double bear" ETF on the commercial real estate index ($DJUSRE). I am doing this because I see this as a 1-4 week quick trade and don't want to get too overleveraged or deal with the option liquidity issues (i.e. bid-ask price spreads eat heavily into profits for small moves) for such a short-term trade. Below is a current chart of $DJUSRE:



A potential road map for this $DJUSRE trade is the chart from one year ago for the $DJUSHB (December, 2007).



Perhaps even better would be the 2006 crash and recovery into 2007 in the $DJUSHB chart:



See previous post for my "phase shift" trade logic between $DJUSRE and $DJUSHB. Anyhoo, with SRS giving double leverage, there is the possibility for a 40-60% gain. I'll be shooting for a 20-30% gain by buying SRS if the set-up presents itself as anticipated. I'll be using a stop-loss to minimize risk on this trade, since this is a shorter time horizon than I typically use for a trade. Stop losses allow you to enter a maximal loss level you are willing to accept before dumping the trade and taking a small loss.

Also, it is important to keep in mind that $DJUSRE, $DJUSHB, $DJUSFN and $BKX are not done rallying yet, I just think they're going to take a breather in the next 1-2 weeks, as the correction has been fast and furious so far. Once the current sub-leg of the stock rally ends, almost certainly before Christmas, a 2-6 week correction should occur, then another leg up of the rally into the March-April time frame, when the rally should end and the next BIG leg down of the bear market should begin.

Gold stocks will follow the general markets fairly closely over the next few months, but will finish the spring rally much stronger than regular stocks and will then undergo a bull market correction after the spring. The disparity between gold stocks and regular stocks will become quite apparent in the summer of 2009, as regular stocks will be heading for new lows while gold stocks undergo a routine correction and resists the full downward pull of the general markets.

If you're not a believer now, you will be by the end of the summer, when it will be time to load up heavily on gold stocks. Me, I'll be buying long-term call options on gold stocks next summer, but without options, 100-150% gains will be achievable by buying gold stocks in the summer of 2009 and selling them in the spring of 2010. For those interested in buying and holding for ASTOUNDING 3-4 year profits, the exact entry point isn't as important. However, this current gold stock sub-leg up should be ending in a few weeks and a better buy entry point will come in January-February, 2009.