Markets I Trade: February 26, 2019

In my non-registered account, I am developing my trend following strategy continuously. I don’t pretend to have all the answers. I am sharing this ongoing learning journey with you in this series.

I am always exploring new ways of trading, new markets to access, and better control of risk and opportunities. My main goal is to avoid large losses while achieving reasonable returns over time. I try to focus on trades which I believe have good reward-to-risk ratios.

You will see me trade index products, currencies, and commodities primarily with futures contracts and LEAPS options for maximum capital efficiency. I try risk small amounts of capital with each trade targeting high return multiples on that risk.

IWM: LEAPS Options

Source: StockCharts.com

I purchased IWM $160 call options on January 15, 2019 when IWM was trading at approximately $143 per unit. With the recent advance of U.S. Small Cap stocks, my stop has moved past purchase price and my options are nearly at-the-money.

IWM is in an overbought range at this point. At some point, the buying should relax allowing prices to drop. IWM has had barely a few down days in the past two months. As I stated last week, I am expecting the price is likely pull back somewhat in the coming weeks.

EEM: LEAPS Options

Source: StockCharts.com

I purchased EEM $45 call options on January 15, 2019 when EEM was trading at approximately $40.50 per unit. EEM has moved up in price since my purchase and my stop is set at a little under $40.

EEM had a moderate pullback at the beginning of the month, but is now moving higher. I am looking for the price to move strongly past the $43.50 level to indicate a healthy continuing uptrend.

EWZ: LEAPS Options

Source: StockCharts.com

I purchased EWZ $50 call options on January 25, 2019 when EWZ was trading at approximately $44 per unit. Since last week we have no seen a higher high, so I'm holding my stop level at a little under $40.

While EWZ does seem to be grinding its way higher, it is certainly not a very strong uptrend at this stage. I am waiting to see a move past $45.50 over the coming weeks.

GLD: LEAPS Options

Source: StockCharts.com

I purchased GLD $125 call options on November 19, 2018 when GLD was trading at approximately $115.65 per unit. This has been a very profitable trade for me; my stop is set a little under $122 per unit right now.

GLD has been in a textbook uptrend since my purchase. There are small pullbacks on overbought readings with continuations to higher highs that follow. There is little not to like about this gold move right now. I'm looking for GLD to break past $127 in this next move.

VXZB: Options

Source: StockCharts.com

I purchased VXZB $20 put options on January 16, 2019 when EWZ was trading at approximately $20.40 per unit. This is a volatility short trade that I made following the volatility spike we saw in December. So far the trade has nicely moved into profit.

For my stops, I track the more responsive VIX Index and VXXB ETF which both do not translate directly over to values in VXZB. At this point I would look for VXXB to spike above $40 to close this trade.

KWEB: LEAPS Options

Source: StockCharts.com

I purchased KWEB $50 call options on February 20, 2019 when KWEB was trading at approximately $45.10 per unit. Since my purchase, the price of KWEB has increased to $46 so my trade is in profit with a current stop set at $39.40.

KWEB is a Chinese Internet Index ETF that got absolutely hammered in 2018. It provides exposure to Chinese-based tech companies like Alibaba and Tencent. I would consider KWEB to be a concentrated, higher risk bet.

DXJ: LEAPS Options

Source: StockCharts.com

I purchased DXJ $55 call options on February 22, 2019 when DXJ was trading a little under $51 per unit. My initial stop is set at $47.60 per unit.

Like many other equity markets, Japanese stocks are setting a pattern of higher lows and higher highs since the end of December. We'll see if this pattern continues over the coming months.

Silver: Futures Contracts

Source: StockCharts.com

I purchased Silver futures contracts on December 20, 2018 at approximately $14.83 per ounce. Silver has moved up in price since my purchase and my stop is set at $15.10 per ounce.

This past week, silver got held back again at $16.20 per ounce. While it's too early to tell if this is a top in the current uptrend, it would be important to see silver move past this number for the uptrend to hold.

Brazilian Real: Futures Contracts

Source: StockCharts.com

I purchased Brazilian real futures contracts on January 3, 2019 at approximately US$0.267 per real. The real has strengthened slightly against the dollar since my purchase. I have my stop set at US$0.253 per real.

For a continued strengthening uptrend, I am looking for the real to move past the $0.275 level that we saw at the end of January.

South African Rand: Futures Contracts

Source: StockCharts.com

I purchased South African rand futures contracts on January 25, 2019 at approximately US$0.0731 per rand. The rand has weakened a bit against the dollar since my purchase. I have my stop set at US$0.0692 per rand.

The rand actually tested my stop this past week, held the price, and moved back up. I will look for the rand to move back to those January highs. If you look at the chart above (inverse of the rand value), you can see a clear pattern of higher lows since last September.

At this point I've basically exhausted all of the long equity ETF positions that I would be interested in pursuing. I believe I have relatively broad exposure to all the major equity markets except for European stocks. I am still looking at some currency pairs to add to my positions.

Comments & Questions

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Developments in Cryptocurrency

As many speculators keeping an eye on the space know, cryptocurrencies as a whole got absolutely hammered in 2018. This event was quite predictable given the mania that occurred in 2017 and early 2018. Everyone who asked me about cryptos at that time got a firm answer, "Stay away!"

Electronic tokens trading at valuations of billions of dollars when no-one even knows what to do with them is crazy! Sure, sending money around the world quickly and at a low cost is fantastic, but anyone with an ounce of honesty knew they weren't buying cryptos for that.

What Happened in 2018?

A lot of people who jumped into the space to buy Bitcoin and other "alt-coins" in 2017 have learned a hard lesson in speculation. Many have lost 80 to 90 percent of their money last year. Others got ripped off by exchange hacks, poor security, and scammers or lost access to their wallets.

However, 2018 was actually a great year in the blockchain world as far as the technology goes. This past year we are seeing better development of smart contracts, higher transaction capacity within the various protocols, increased efficiency, and some interesting end-user emerging projects.

For example, artists may soon be able to load their creative work on blockchain platforms and receive micropayments for each "listen" or "view" directly from their consumer. Code can be embedded into the work to prevent loss of revenue from things like torrent uploads.

Websites and blogs could attach micropayments to articles so readers can show appreciation for the work done by the authors. While many would shy away from a $10 monthly subscription (a general minimum amount required to make a credit card transaction viable), paying something like 1/10th of a penny to read an article might be acceptable.

There are also some very interesting advancements using blockchain contracts for betting. One project, Augur, is establishing an open-source market for bets. While not yet fully active, the idea is that users will be able to freely design bets of all kinds and settle in cryptocurrencies in a peer-to-peer format.

Beyond gambling on horseracing or election wins, Augur could theoretically host bets that work like options contracts or futures contracts in financial markets. It would completely bypass the exchanges, drastically reduce fees, and eliminate third-party risks as we saw with MF Global and some of the FOREX brokers.

One of the most exciting changes is the continued development of transaction processing and verification. As you might know with Bitcoin, the proof-of-work ("mining") model is very energy intensive. It also limits the number of transactions the system can handle to less than 10 per second.

Cardano, TRON, IOTA, and a few other projects are basing their verification and transaction handling process on proof-of-stake protocols. They claim this will allow great decentralization, be highly secure, and the blockchain will be able to handle hundreds of transactions per second with a roadmap to increase this to thousands of transactions per second.

The second largest blockchain platform, Ethereum, is said to be moving to a proof-of-stake protocol as well in the coming year so they can increase their transaction capacity and reduce the energy intensive "mining" process.

These developments are showing a use case for blockchain and cryptocurrencies that can be understood by the broader public. The blockchain is becoming more user friendly and it's only a matter of time before average Internet users will be able to use the blockchain for a wide variety of tasks.

It could be compared in many ways to the Internet: developing from a technical network used by universities and defense contractors to today's user friendly tools like Google, WordPress, and Interactive Brokers.

I suspect we might be at the beginning stages of a very exciting time in the blockchain world. If even a fraction of the blockchain ideas proceed, it will be a major disrupter to today's giant "middlemen" corporations: banks, exchanges, lawyers, payment processing companies, data management companies, and so on.

Speculating in Blockchain/Cryptocurrencies

From a technical trading perspective, a number of cryptocurrencies are beginning to look much more attractive. I'm particularly interested in the cryptos which are making large strides in technology—often called the 3rd generation blockchain.

Ethereum

Source: Yahoo Finance

While technically still a second generation blockchain project, Ethereum started the idea of smart contracts and has an active developer community working on moving the blockchain into the third generation to compete with Cardano and TRON.

After bumping up against the 10-week simple moving average for most of 2018, Ethereum solidly crossed over and has been climbing upwards for the past three weeks. The crypto also hit long-term oversold conditions in December 2018.

Cardano

Source: Yahoo Finance

Cardano is solidly a third generation blockchain with ample academic research behind it. The developers are working hard perfecting proof-of-stake models and are making significant progress in other areas of the protocol as well.

This is a newer blockchain that is still in early stages of development. However, it is also one of the most interesting projects in the entire space. If even a portion of their objectives are achieved, Cardano could be a blockchain platform that is a true game changer.

Cardano features a similar technical picture as Ethereum. The last several weeks have seen a turnaround that could be very promising for speculators.

TRON

Source: Yahoo Finance

TRON was formerly a token issued under the Ethereum blockchain. A migration to an independent third generation blockchain took place in June 2018. TRON has focused their efforts on the entertainment industry.

TRON is a Chinese-based blockchain group with many developers who formerly worked at companies like Tencent, Baidu, and Alibaba. The team seems highly centered around the CEO Justin Sun. TRON does state it is a fully decentralized blockchain which is a not-for-profit.

Summary

While still highly speculative and risky for any individual investor, cryptocurrencies seem to have finally shaken off the mania of the past several years. Interesting things are happening in this space.

Using simple trend indicators, some of the better cryptocurrencies are making a shift from a long, solid downtrend to a potentially promising uptrend. This could be a good time to take a closer look at some of these currencies and add a tiny amount to your portfolio.

I think it's still fair to say that many of these blockchain projects will fail and their associated currencies will be worthless. Proper risk management is absolutely crucial in this space as it is in all investing applications.

Some of the most interesting blockchain projects in my view are Cardano, TRON, and Ethereum. As these projects continue to develop their capacity and end-user tools, their adoption could become much more widespread. That can only mean one thing for their associated currency valuations.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.