Book Review: "Economics In One Lesson"

Today I have decided to finally answer the call of many students who ask such inquisitive questions as "who was your mentor...?"  It's a natural question and one I would gladly answer if I had just one mentor.  Unfortunately when I learned to trade I learned the hard way... by studying my butt off.   Of course during that study I met many wonderful teachers, trainers, and dare I say mentors... it's just that most of them came in the form of books!  So to finally fulfill the answer to these persistent questions I have decided to do so by offering reviews/reports on books I have read or I am in the process of reading.  In the case of today's book... well it's an oldie but a goodie. 

I first became acquainted with this book when I was in college.  It showed up in a general education class where we were suppose to learn all about socionomics and economics... I personally only learned about Mt. Dew and Coffee.... but I digress.

  

Not long ago I whipped out this little gem and thought "I wonder what I was suppose to learn from this book".  Upon this more recent reading I confirmed that in fact my college education was there all along - it was I who was missing from college.  For this little book contains prophecies written many years before Credit Defaults, Bank Bailouts, TARP monies, and any of our current troubles began.  But these prophecies... oh somehow they knew this day would come.  

For those who haven't read it Economics in One Lesson by Henry Hazlitt is a classic book originally published in 1946 which teaches just that... the whole substance of economics in just one lesson.  The irony of this lesson is the fact that it has much less to do with the lesson than it has to do with the false thinking that leads a government to ignore the insights in the lesson.   The lesson is simple: Economics is a constant battle of cause and effect.   I believe the world of physics has brought us such insight as "every action has an equal and opposite reaction".  And yet few in our modern world have drawn the conclusion that economics also obeys the same law - for every economic action there is an equal and opposite reaction.  

Hazlitt wrote his book just after the great depression and managed to foresee 60 years ago exactly where the US Government is today.  Discussing everything from Government subsidies to state and local taxes, imports & exports to the cost of goods - Hazlitt offers an excellent discussion of basic capitalism and how free markets are destined to work so long as government does not interfere.  While I wish I could make everybody in congress read this book I know I can not.  But I can certainly encourage you to read it.  Well worth your time Economics in One Lesson will help you understand why government spending and bureaucratic control  can never by it's very nature fix the problem they set out to solve.  All government can do is prolong the natural healing of the free market cycle.  

Be careful.  This book may make you rethink your position on government and certainly any party loyalty you may hold.  But it will no doubt give you insights in to what is happening today and why the free markets are responding so negatively to this government control.  

Memorial Day: Thank You To Our Troops

Memorial Day.   In America this very special day is a day we remember those who have served our country with the highest honor - the honor of serving through military service.  Hundreds of thousands of men and women have served during our short time as a nation - many of them have given their lives for what they believed.  Those sacrifices are the very reason you and I are able to live in a world with a country like The United States of America.  A world where free enterprise is the predominant form of economy.  A world where capitalism is king.  A world with free markets that allow us to participate in the brilliant ideas of others.  Yes I believe with all my heart the sacrifice of our military is by all means one of the greatest contributions a person can make with their life.  

 I believe it not just because I'm an American but because to me it's personal.  Not because I have ever personally had the honor of serving, but my family has.  My grandfather fought with the US troops in World War II.  And this very day as I write this blog post my uncle Rodney Whaley is currently serving our country in his uniform in the nation of Kuwait.  I'm proud of these men.  They are more than family, they are heros to me.  Their core belief in what our country stands for and believes is the reason they have put their lives on the line.  And on this memorial day I choose to use the relatively small platform I have in the form of this blog to say thank you.  Thank you to to Uncle Rodney.  My Grandpa Whaley.  And thank you to everyone who has ever put on the uniform of the US military to help protect and defend our freedoms.  

 (As a side note - Financial Puzzle offers completely free or highly discounted rates to all active duty military.  Please send a private message if you qualify)

Four Profitable Trades for THIS WEEK!

Okay - I pretty much NEVER give out secret trades. The reason for this is because my anxious students always put money on the trade, rather than learning to trade first. Of course inevitably a trade slips out and someone does it. I really don't mind because they are usually great trades. Last time I did this Liz made over $14,000 on RIMM for the earnings trade I let slip out (oh yea, that was in 1 day!). Oops! So you can understand why students keep saying "give me another RIMM trade.."

Today, friends, I have heard your cry. And today I will not give you another RIMM trade. Instead I will give you 4 trades that very could make you some serious money THIS WEEK!

1) FSLR

FSLR is slated to release earnings TOMORROW after the close. FSLR, being the stock it is, tends to move far on earnings. Consequently there is a really great earnings trade set up.

First of all everything is set up perfectly for a break. A slight better chance of a bullish break than a bearish break, but with earnings coming up you don't want to risk it. Let's call it neutral.

Secondly FSLR is has a Bollinger Band squeeze play shaping up. There's two good things about this. 1) It indicates an impending move. 2) Volatility is typically a bit lower. given the extreme volatility on FSLR options any discount is a good thing.

The way this trade would set up is tomorrow buy both a CALL AND a PUT. One on each side of the stock. You do this so you can make money if the stock goes up, and you can make money if the stock goes down. It's a win win trade when you know news is coming out. The upside target is $160 minimum, and $180 on the high end. And what happens if they miss? $130 on the downside with $103 being the ultimate downside target.

This trade does have 1 small drawdown. That is the price of the options are still a bit steep. Since you know you will loose most if not all of the value of one of these options the initial investment may not be worth it for you. If you like the trade however but don't want to do it on FSLR - try the same trade on VAR!

2) C

Let's face it - all the financials are a wreck. And most people are running with all their might away from them. However if you have one (like Citi) that the governement has promised it will NOT let fail, and it's trading so cheap you can buy the stock for less than most option purchases... well it's a Covered Call trade made in heaven.

C closed today just under $3.00. Buy 1000 shares for $2.89 and turn right around and write a $3 covered call for $.25. That will bring in almost 10% immediately and you'll be out of the trade in less than 3 weeks. Plus you still own the stock. Next month you can do it again. Worst case? You get called out at $3/share and keep your .25 premium. So you cleared $3.25 on a stock you paid $2.89. That's better than 10%. Not too shabby for financials!

3) AZO

Autozone has traded into an amazing Bollinger Band squeeze with very low volatility. That means as soon as it breaks, it's going to be strong, mighty, and profitable. With earnings coming up at the end of the month I would anticipate a relatively quick break as traders anticipate the earnings announcement. If this stock moves above 167.75, consider buying some June 160 Calls. OR, if it moves below 154.75 consider buying some June 160 Puts. Either one should bring you a solid $10+/share.


4) AAPL

And my favorite strategy on my favorite stock. AAPL should continue it's bullish move on up to about 135-138. However it's doing some resting at the moment. So consider a BULL PUT SPREAD on AAPL by selling the MAY 120 Put and bringing in around $2.50/share. And buying the MAY 115 Put for about $1.20/share. It's an easy 20%+ over the next 3 weeks.


Hope these help. Don't forget our next Foundations class starts TONIGHT at 11:00 EST. We have just a few seats left. See you there.

S&P ready for a turn around?

The recent action on the S&P has produced what most would consider an Inverse Head & Shoulder pattern on the weekly chart. This pattern is typically a solid reversal signal when seen at the bottom of a downward trend. Traditional Technical Analysis wisdom would say to enter a bullish position if/when the neckline is broken to the upside. However for those who are following Elliott Wave progressions a solid bull move is not in the near future. I wonder who will win?

Really who cares? The important thing is you are prepared as an investor to profit on both sides of the trade no matter which way the market moves. If you don't have that kind of trading confidence you should consider taking this month's Foundations of Stocks & Options class which starts tomorrow night. This is a $600 class but we're waving tuition. So sign up and learn how you too can profit with any market swing.

Google Trading in Symmetrical Triangle

Check it out - Google is forming a symmetrical triangle. These triangles are technically a consolidation pattern meaning they could move either way, however there may be a slight tendency to continue bullish. However the good news for the more aggressive trader is you can enter a trade as soon as the triangle is broken. The best thing about Google is once it breaks - we've got some great profits to be made.

If you'd like to know how to make your own analysis like this sign up for our Foundations of Stocks and Options class starting TOMORROW!

Charts for Foundations Top 9

Many of our students have been asking if I would post a copy of our charts so they can see the lines we've drawn just to make sure their lines are "lining up". But after some thought I figure why limit all these lines just to the class? So I'm posting them on the blog for all to see - even adding some analysis for you! These screen shots were all taken Sunday night, April 26. The lines however have been in place for quite a while of course. To enlarge a picture just click on it.

Let's get things started with the Dow:

Of course the Dow has been in a pretty nice little rally over the last two months and most recently we've been trapped in a bit of a rectangle pattern. Very soon we should see a break one way or the other. However don't get too excited about the bull rally. While we may see a bullish break up to the 8300 area this rally is still quite weak. Expect a pull back for sure in the near term. Either a brief rest pulling back to 7500 before rallying on up to 9000, or just a flat out roll over all the way down to the 6600 range.

And now let's move on to SLB:


SLB has been in a solid trading range for the last 6 months. However finally on Friday we saw a break out of the trading range. A better than expected earnings report fueled the surge but after a full day of trading the stock managed to throw a Doji candlestick - showing great indecision. If we see a move to the upside that takes out Friday's highs a nice size bullish move is likely. Otherwise expect to see some time testing the freshly busted resistance line to see if it will hold as support.

SHLD:


We havn't looked at SHLD as much in class recently as some other stocks but it's in a very interesting spot for sure. Over the last month SHLD has moved nicely up to a solid resistance line just north of $60. However you can see the long term resistance line also coming in to play and providing some extra resistance. While this recent trend should be sustainable in the long run in the short while the stock is a bit overbought and will probably trade sideways or slightly down for a few days. We may even see a testing of the $50 support line before a new wave of bullish power comes running in.

RIMM:
RIMM has become a favorite of many of our students. It could be because of the subtle suggestion to try a option strangle over earnings which profited several students quite well. One of them showed up to class three days later with a cool $14,000 profit in her account - oops...

So what's next for this money making wonder? While the recent moves have certianly been nice they have also been a bit fast. Our resistance around $69 has proven to be a slow down but we'll have to wait a bit to see how much resistance it holds. Indicators are certainly showing a need for a brief rest, but otherwise this stock could move much higher. The next big target is the bottom of the large gap back in September around $77. We're about to see the rest of the moving average crosses complete as the 10 day is approaching the 200 day. Give it a day or two and we may well see a direction defined.

PBR:

Ahh - who doesn't want a little Brazilian Beer... or oil I mean. This has been a fun stock to trade since the bull rally starting around $15 since it's bottom back in November has been a very nice move. A young student of technical analysis would likely expect this stock to continue moving higher in what looks like a well defined stable trend. However all traders should be aware that we have a serious case of bearish divergence shaping up. When we see divergence on MACD it's usually worth taking note. However it's pretty rare to see divergence occur at the same time on all three of our indicators that can show divergence. But Stochastics, RSI and MACD are all three showing warnings. An upcoming bearish move is likely imminant.

MA:

Mastercard has spent the last month trying to break out of it's multi-month pattern. A small pull back may have just set the angle for a new bull move. And the bullish engulfing candlestick pattern on the 21st indicates a bullish move. The only thing really holding it back is some potential resistance around $176.

GOOG:
The mob boss of internet search engines has certainly taken its share of beatings over the last year. Most recently GOOG has been attempting a bullish move to return to the glory days of $700/share stock. If we can see a break of this $394 resistance this week may see that next big move. With the next big resistance showing up at $460 there's plenty of money on the table to be made with this trade. With falling volume the current price behavior closely resembles a continuation pattern so watch for a break out with good volume. If it happens this week ride that bull!

BIDU:

The Chinese Google, or so they say... Certainly a fun trade. The recent bullish move has been a great move for those who are long but running into some new resistance around $225 may be a problem. If we see a solid push through continue bullish, otherwise this stock may need to rest a few days.

AAPL:

A good Apple trade a day keeps the cash flowing your way... or so we hope. The current patterns settting up on aapl could prove very profitable depending on how they play out. If we can take out the highs a couple days ago at 127 this stock has no reason not to run on up to the long term resistance which should intersect around 135-137. That's a pretty easy $8-10 move on the table.

AZO:
And last but not least our wonder stock of the great recession. Apparently the auto industry may be dying but repairing older cars is a booming business. While it's been a great move not all things can rise forever. We could be seeing a double top form which would lead many to take on bearish positions. However the good news is this stock has traded sideways long enough to pretty much reset itself. So a move either way is certainly feasable. The best news is that move should bring an easy $15-20 profit. The current bollinger band squeeze is a perfect set up for a volatility trade. These are the things great profits are made of my friends...

And there's the charts along with some basic analysis. Don't forget Tuesday starts a whole new Foundations of stocks and options class and we still have a few scholarships available. Sign up now to secure your seat and learn how to do your own analysis of these trades.

Killer Trade Set up on AZO

AZO has set up a trading opportunity that is just too sweet to not blog about. Check out this text book Bollinger Band Squeeze play.


As the bands squeeze together it shows low volatility and also reflects the fact the stock is resting. Watch for a break above or below the bands and trade in that direction. Here's what it looks like with standard lines drawn.


A bullish entry point here would be a close above $167 and a bearish entry would be a close below $155. Both with good volume of course. All of the other indicators are beginning to reflect this breakout as well and ADX indicates it's ready for a trend to begin. A move either way should be able to profit $15-25.

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