Crude Oil, HOU and HOD ETFs

Someone asked me about investing in oil the other day. I am not going to be doing so but I do watch other charts and markets seeing as I have to buy gas and it affects almost every facet of life somehow. So one method of offsetting the additional costs of oil induced increases is to own oil stocks that pay when the oil price is high. Dividends are nice but not necessary...in my view.

So, this brings me around to another of the Exchange Traded Funds (ETF).

The short story is that these funds track the sector, or commodity they are named for.

Horizons BetaPro NYMEX Crude Oil Bull Plus ETF... or HOU.TO.


This is a fairly new fund so the 200sma is just getting going, les thana year old. I circled the nicest positive divergence you could ask for. The price is levelling out and the MACD has been steadily rising since October. Personally I would give this one another chance for a pullback before buying in but if a little risk is in the books then it could be purchased now too. Perhaps scale into the investment.

The nice thing about this is there is little fear of the underlying company doing anything weird (Enron anyone?) as there is no underlying company.

Here is a zoom in of the main activity lately...

It looks to me like $10 is about as low as it can go...but that certainly is not a guarantee. Once the red 30sma crosses the blue 50sma I would consider it back in the bullish territory...by then the price could be back up to $20 quite easily. The trick is whether it will stay up or not. As a position trader I would not wait quite that long anyway...one more low to see where the support really is then it would be time to read the chart again. Anything under $10 would be worth the risk for a small position.

This brings back memories of the CTP strategy.

As I will be day trading my full account I don't even have room to sneak 100 shares of this ETF or I just might...although if it drops to $10 even, again, it would certainly be doable, I'd make it work for that.

Here is the inverse ETF, Horizons BetaPro NYMEX Crude Oil Bear Plus ETF... or HOD.TO

This is for those who want to play against oil climbing.

Jeff.

ETF's HED and the Capped Energy Index

Here is a sample of a down day and what an ETF trading might be able to do in place of short selling the regular stocks.

December 22nd, 2008.
SPT/TSX Capped Energy
Dark blue is the previous day close
Light blue is the Primary Pivot point
Green are the S1, S2 and S3

Yup, definitely a down day as the index lost close to 6%. The S1-3 did not mean a whole lot here but there were some bits of support as the price fell and some definite resistance around the $199 mark.

Suncor for the same day

Support fell in some key points and would have been nice setups for some short selling. Too bad I was not watching for these that day. I did trade it and had five trades 3 long fighting the trend and two short. 65 cents gained long (I captured the first big move from $24.40 to $24.90) and only 52 cents gained short as I did not watch the market at all after the first long trades, I got busy with other stuff and came in later in the afternoon when everything had already done most of the dropping.

HED, Horizons BetaPro S&P/TSX Capped Energy Bear Plus ETF, same day

Buy $21.33 Sell $21.64 Gain 31 cents ps Return 1.5%
Buy $21.91 Sell $22.27 Gain 36 cents ps Return 1.6%
Buy $22.61 Sell $23.01 Gain 40 cents ps Return 1.8%
Buy $23.11 Sell $23.31 Gain 20 cents ps Return 0.9%

$1.27 gain per share or 5.8% overall return on trades

This would fall under my multiple lot position sizing as well.
I need to actually make some ETF trades to know how they will behave. The volume is a little low bit the price is more dependant upon the underlying index than the bids and asks. It can indicate a sentiment but not a definite directional move. One thing that I noted today while watching a few ETFs is that the quote spread can be substantial. They just don't feel the same as a stock. It might be partly due to the reverse movement as well as the non-stock quotes.

I think this will be a reasonable substitute for short selling, though it may only be used on those definite downtrend days as I don't think it a great vehicle to attempt to use for those quick drops in price that I might normally try a short while in between long trades.

Jeff.

Pivot points and the 200sma

When I first started trading I tried to set up semi-mechanical systems with limited success. I liked the idea of having the indicators make the decisions to buy and sell for me, mostly. The trouble was I did not trust it as well as perhaps I should have, I was new. I do not believe that mechanical systems are a great idea but they can work. One of the key factors is that they have to change according to the market, as any plan must.

So this is as close to mechanical as I am likely to get as I notice some correlation between the pivot points and the 200 sma line in my charts that perhaps can help to set the trade bias for the short term and perhaps even be used for some lazy trading.

Actually, this is not so much for lazy trading as it might be to let me track a few stocks at the same time. This comes back to the fact that I cannot use short sells in my trading and I will therefore need to watch more charts in order to be able to keep money active while things are turning down.

Pivot points and the 200sma are not so much points or lines as they are zones of support and resistance. In this sense they are areas to watch for activity that may indicate a good time to enter or exit a stock based on other indicators such as the quotes, volume, time and sales and correlating indices.

Here are two charts for today, the first fo SU and the second for TLM.
Blue is the previous day close
Red are the R1, R2, R3
Green arrows are buy points and red are sell points
Green line is the 200 simple moving average



For SU the primary pivot point is below the chart.

The mechanical idea here is that the pivot points and closing price will act as triggers for opening a trade long. Closing the trade is given more leeway but these points will also play into this as well. I did watch these this morning and know that the trades as indicated were definitely possible and would look just like they do on the charts, nice clean setups. A few of them I tracked but most I did not watch that closely.

Buy $26.60 Sell $27.40 Gain 80 cents ps Return 3%
Buy $27.40 Sell $28.00 Gain 60 cents ps Return 2.2%
Buy $27.75 Sell $28.10 Gain 35 cents ps Return 1.3%
Buy $27.80 Sell $28.10 Gain 30 cents ps Return 1%

$2.05 gain per share or 7.5% overall return on trades

Here is where the 200sma relationship keeps the trades capped. As the price drops below 200 the best next trades would be short, but I cannot trade short sells so this just keeps me out of the action here which is where the ETF comes in, but that is another story.

TLM followed a very similar idea, as it should as it also follows the capped energy index reasonably well, although today was a bit off as I couldn't really rely on the strong sector as an indicator.

Buy $12.90 Sell $13.10 Gain 20 cents ps Return 1.6%
Buy $13.02 Sell $13.22 Gain 22 cents ps Return 1.7%
Buy $13.16 Sell $13.24 Gain 8 cents ps Return 0.6%

50 cents gain per share or 3.8% overall return on trades

Keep in mind that I plan on having a certain dollar amount committed to these trades so SU might be a 100 share position and TLM would be a 300 share position. In those cases the net gains would be $165 and $120 respectively.

It is a shame that short selling will no longer be available to me as there were as many opportunities to short as there were to go long even with the strong rally over the day. I consider the fact that there will be no taxes on any of the profits and that will make up for a large part of this minor restriction.

Jeff.

Pivot Points and their relevance

I stumbled upon pivot points a while ago quite by accident. It was mentioned in an article and the term intrigued me enough to go looking them up. Now I do not trade without them, real or fake trading. I have found that they make very good targets and I suppose it is not so much that they are predictive, as it would appear by the following chart, but more likely a self fulfilling prophetic tool because many traders are using them.

TLM on Friday. The pivot points are represented by the three red lines which are resistance level 1, 2 and 3. The primary pivot point is just below the chart and labelled PP.

Alas, I did no trading on Friday. Busy with holidaying.

I have been plotting these lines on SU, AEM, the gold index and the energy index as well as the TSX or whatever other chart I might be using for trading and reference. TLM seems to follow them even closer than the other stocks, which I found interesting.

The blue circle represents the only questionable period as the price spent a bit of time consolidating before breaking R1. I expect that I might have shorted at about 0945h to try to catch a pullback from R1 to only exit the trade a few minutes later as the price did not successfully break the 10sma. Perhaps the trade would have broke even or a few cents per share profit. Then again I cannot short in the TFTA so this trade is moot.

The price ratcheted upwards towards R1 after testing 10sma a couple of times so this would have made a very nice position entry. This is the kind of setup where scaling out of a trade would come in nicely. R2 would be the target but the price cleanly broke that level and pulled back to test it. Selling half of the position and leaving the rest go would be a good call.

Following just the pivot points and trading long only, there would have been a trade just before noon for about 10 cents per share, one at 1345h for 5 or 6 cents and one last trade shortly after 1400h for about 30 cents per share...but that would involve watching all day.

The whole point is that pivot points are one of the few tools that are not dependant on the price and volume on the day of trading. These lines are calculated easily and are placed at anytime after the previous day's close as they have been determined by the previous day, week and/or month's price movement alone and have been used for quite some time by traders to determine where the trading range may be for a given day. They have proven very useful to me.

I won't get into the formula that I use but it is a standard one that is easily found on a variety of sites online. Setting up a spreadsheet with formulae to calculate these is easy enough as well so you can just enter the open, high, low and close and have the points. The open is not used but I like to reference it. Some trading platforms have these as an automatic tool, which would be really nice but I am not going there any time soon as these are pricey packages that may not even work with my broker feed...so I haven't looked too closely at that yet.

Jeff.

Exchange Traded Funds (ETF)

Here are four charts that might be examples of what I would be tracking at once.

This first is the Horizons BetsPro S&P/TSX Capped Energy Bear Plus ETF for last Friday afternoon trading. This tracks the TSX capped energy index inversely.

This second chart is the same period for the Bull version of the fund as it tracks the energy index directly. Note that the price is not in the same range.

This is the S&P/ TSX Capped Energy Index itself.


This last chart is Suncor Energy.




The correlation of Suncor and the TSX Energy index is more obvious when looked at in better detail but the pattern is pretty obvious.

The volume of the two ETFs is substantially lower than SU. The volume is not a factor in the ETF's though as they are tracked to the index with some variance due to the bid/ask spread of the ETF. I need to watch these ETFs to see how they behave and it will be different trying to trade a derivative that is not driven by the traders trading it directly.

It is worth noting that ETF's can be traded using all the normal order types available to use with regular stocks, limits, stops, shorts, probably VTSOs and I understand that there are even options on these as well...although I don't anticipate using those.

There are a number available for most of the popular indices, gold, natural gas, oil, financial etc.

Jeff.

Questrade, TFTA, a change of rules, mine

This whole last few months I've been going on about the Tax Free Savings (Trading) Account (TFTA) and how I was going to use it for all of my trading. Yesterday I filled out the application and forwarded it to Questrade. They have a method of e-signing the forms, which may be only available to existing customers, that sped up the whole process. All I have to do is fax them a copy of my driver's license, EFT some cash and I should be ready to go in short order. Pretty simple and quick.

So, in reading the details I ran across the phrase "capital gains" when referring to what can grow tax free within the account. It occurred to me that the profit from short selling stocks is not, technically, capital gains and if push comes to shove with the government they are treated as regular income for tax purposes...again, not capital gains.

I used the online help feature and had my answer in a minute. No, shorting is not allowed in a TFTA. I actually should have known this as I knew that shorting was not allowed in an RRSP account either. I was blinded by the fact that I could short in a margin account and the gains looked really promising...my research was lacking.

I quickly went back over all of my previous trades to see how much of my profit would have been from short selling. This was easy enough as I have always kept a long/short profit ratio for all my tracking spreadsheets. Note that this is not a ratio of number of trades, just profit.

Overall I am running about 1:1. So half of my trading profit would not be counted. Seeing as my performance is close to 2% per day I would be just shy of my daily goal if I dropped half of my trades...or my trading profit. I consider that I usually stop at a daily maximum of 6 trades, more often 4. So if I was concentrating on making that many trades and with long only positions I may have been able to make 75% of the trades. So I might have seen 1.5% per day.

My options to adjust my trading plan include:

1) long only trades with the same plan that I have been using, result may be 25% - 50% reduction in profits

2) long in the TFTA, short in margin, result is taxable (max marginal rate) for all short profits so the overall effect would be pretty close to option 1), within 10%

3) variation of option 2) in that all profits at year end for shorts are contributed to my RRSP account whereby the taxation is negated but the downside is that these will be taxed upon withdrawal... perhaps at a lower tax rate at the time

4) variation of option 1) by using only the TFTA, trading my favourite stocks long and shorting the index that they are tracking through the use of a bear Exchange Traded Fund (ETF), result is the same tax free profit potential as I was planning on originally

Well, option 4 becomes the no brainer solution to my dilemma it would appear. In investigating the ETFs I start to wonder if I can trade them exclusively.

This would be easy enough as I just run the bear and corresponding bull ETF side by side with the related index they track and the TSX for the overall market and trade them back and forth. When one is rallying the other will be pulling back which means that one or the other will always be gaining...except in a true sidways market move. The difference in prices will necessitate using different position sizing for each which will look after the scaling according to the size of the move. Roughly a 1% gain in one will yield a 1% drop in the other.

In the interest of keeping it simple I think I will start out with option 1) only and see how it goes. I believe that the stocks I have selected will be seeing some gains over the next while so long positions will be many, I may have to increase my time trading by a bit though. If that does not pan out then I will play with the ETF and see how they work out for trade executions and perhaps mix it up from there.

I will have to wait for my TFTA to get going first as I really want to stay away from any gains in this 2009 tax year.

I should have known it was not going to be such an easy ride and that the testing was not yet complete. Too bad as I would have liked to have had this ironed out earlier. If I do some testing with the expectation of a loss then it will reduce the capital in my account as I cannot just "top it off" after testing is complete. $5K contributed is the limit no matter the trading losses incurred...unless I over-contribute and pay the monthly penalty. Questrade may enforce the maximum as their policy is worded in such a way at that is possible.

Jeff.