Even in obscurity we can help

The story goes that many years ago there was a priest who lived in the Australian high country. Every morning at 6.30am he would say Mass but nobody came. The days stretched into weeks and the weeks into years. And still, nobody came.

He consoled himself to this disappointment by believing that he was doing something beneficial by praying for all those in need and less fortunate, not only in his own parish, but throughout the world. He prayed for them every morning.

As time went by, he found that in his prayers, he had begun to pray that someone would come to Mass. It was not that his focus has strayed from praying for the less fortunate, but that he longed for someone to join him in his prayers.

Then one day as he was saying Mass, he heard the door to the church open behind him. Then he heard strong purposfull steps making their way down through the church until finally he felt a hand on his shoulder. As he turned, he heard a voice say:.

"Father, can I borrow your mower ?".

Luckily the priest had kept the mower in good shape and was able to help.

Is there a moral to this story, who knows, but it is fair to say that even in obscurity we can offer help when least expected.


Cheers

IBM & Thanksgiving IV Crush

IBM seems to have been really effected by pre holiday weekend IV Crush. The theory is, that as the long four day holiday for Thanksgiving approaches, the Market Makers are pushing down implied volatility quite severely so that they are not giving away free Theta over the long break.

As you can see from this chart of IBM the implied volatility line has dropped by around 6% even though the price has dropped slightly over the same period. Normally, one would expect that if price drops that implied volatility should rise, but not on this occasion it would seem.

Looking at the risk chart of IBM on the left, this represents an IBM Double Calendar as at Wednesday COB 25th November 2009. Notice that the white P&L line is way below the zero line and this trade is making a loss. It was not always like this. Over a week ago the trade was very healthy and making a profit, but as the weekend holiday approached the implied volatility began to drop dramatically.

Now look at the risk chart below - I have rolled the trade date forward to estimate the position as at the Monday after the four day break and also increased the implied volatility up by 5%. This estimate is based on the price chart above which shows a drop of 6%..

Notice that after adjustments the white P&L line is now significantly back above the zero line., Now assuming implied volatility is mean reverting, the volatility should begin an upward journey back to it's mean position over the next week or so. Or maybe not, there are no promises.

However, the risk graph does demonstrate how material the implied volatility crush has effected the profitability of IBM over the past week.

Cheers

National Australia Bank in decline?

Over the past few weeks NAB has been rising with the market in general but is it time to rest? Lets have a look to see if NAB is ready to retrace.

In the above daily chart of NAB we can see the following observations that might indicate that NAB is about to drop.

1. Current price has rolled over and gapped down to $28.89.
2. Price has moved outside the upward regression channel materially the wave 4 Elliott Wave statistical bands have been materially exceeded indicating that a new wave 5 low is a very low probability and that it is more likely that we will get a double bottom around the previous wave 3 low of  $27.85.
   
3. The proprietary Profit Taking Index, (PTI), from Advanced GET is at 23 and is materially below the minimum target of 35, indicating a potential failed wave 4, and
4. The weekly chart shows exactly the same wave count and is seen as a stronger indicator of the wave position than the daily count.

If we force a more aggressive wave count onto the weekly chart we get the following chart.

In this chart we see that the more aggressive count has changed the wave 4 count to a rising wave 3 and that the current retracement is a wave 4 which is well within the wave 4 statistical guidelines with a PTI at 67, it is materially greater than the minimum of 35.

With each of these points in mind, it would seem that the stronger weekly chart indicates that NAB is trending lower but only for the moment and that we should expect a near term low around $27.85 and then for the stock to resume it's upward trend early in the new year - possibly due to the added value drawn from the potential financial rewards of the retailers "Santa Claus rally" - if there is one this year.

Time will tell.

Cheers