Trade Idea for 9/29/08

So far the bottom in the major indices is holding, and the signal that told me to exit our SDS position a couple weeks ago is still in effect. That signal was a divergence between price and an oscillator. As SDS was hitting new highs, neither its MACD nor its RSI were near new highs: a negative divergence. This meant momentum was flagging.



Divergence is a pretty good reversal signal. I am more comfortable using divergences as a signal to exit existing positions than as a signal to enter new ones. Nevertheless, the divergence does indicate that the bottom in the S&P, if it hasn't been hit already, is near. (Recall that S&P is the inverse of SDS.) One thing I have to emphasize is that these divergences can last through a few new highs or lows; that is why it doesn't work spectacularly as an entry signal.

The truth of this statement can be seen in the performance of our two commodity holdings, SLW and DBA. Both had promising setups with positive divergences in RSI, against a worrisome backdrop of medium-term downtrends. But as bottom-fishing picks (and what picks haven't been at this point in the market cycle!), these setups had the highest likelihood of failure of the three types of setups I look for. As it turned out, they have performed poorly. While the RSI divergences indicate that the bottom is near, that doesn't preclude the possibility that price will hit new lows (stopping us out) before reversing for good. However, while they have pulled back farther than I would like to see, I plan to hold at least until the exit guideline conditions are met. (In the case of SLW I already sold a partial based upon an earlier exit guideline.)

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
DBA	33.61	32.62	-2.9%	30.99	Consider selling on a close < 31.99	Chart
SIGA	4.01	3.89	-3.0%	3.18	Consider selling on a close < 3.79	Chart
SLW	10.21	9.07	-11.2%	7.99	Consider selling on a close < 8.99	Chart

Monday promises another crazy open, as the bailout news will probably result in buying pressure at the open (or failing that, selling presssure). If there is an initial surge, will it get faded? We shall see. Meanwhile the idea I have is another bottom fish with an RSI divergence, so don't risk too much if you decide to take it, and don't buy in the first 45 minutes of trading!

Trade Idea for 09/29/08

Ticker	Entry	Exit A	Exit C	Chart
ORA (Ormat)	42.86	39.88	36.90	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.