November 13, 2011

Dan Shy

dan.shy@gmail.com

IN THIS ISSUE:
Welcome!

Premiere Issue
Economic Environment

Welcome to the premiere issue of Aileron Market Balance.

Dividend Investing

Trading Thoughts

A newsletter that will approach the markets with reason and rationality. And as the aileron of an airplane provides stability and balance, this newsletter too aims to reflect a balanced approach to the capital markets. At the same time this newsletter will provide a 'look over my shoulder' as to my thoughts regarding the economy, as well as specific dividend investing and trading ideas for the upcoming week. One should be familiar with two 'Special Reference Issues' before beginning to read this newsletter. Namely, the Aileron Market Balance special issue on Money management, as well as the special issue detailing the portfolio management system that I use. If you need either one of these issues, please feel free to contact me, and I will send them both to you. It may also be helpful to review my trading methodology that can still be found online here1. Now let's get started ...

Model Portfolio

Economic Environment
It takes no great statement of economic insight to state that the entire global economy is entrapped within a snare of debt, slow economic growth and high unemployment. This is obvious to everyone. And then .. there is Europe. I would love to take the entire situation in Europe, and make it very simple and easy to understand. Unfortunately, that task is not so simple. I suppose I could say that if you could imagine the biggest web of debt and 'musical chairs' of debt repayment imaginable, then you have an economic picture of Europe at the moment. Which is why you will continue to hear of European debt problems in the financial news. There is no simple fix on the
1
1 Exact Link - http://www.youtube.com/playlist?list=PL61DCBF4BF4E93A0F

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table that will magically solve and untangle this intricate 'economic knot'. In fact, the blog Future Tense2 created this image of the 'web of debt' illustrating which European country owes what amounts to other European countries capital markets in May of 2010. Crisis points arrive where maturities come due which are past a countries ability to pay. Rebounds usually occur for some time after these 'crisis points' when some sort of short-term 'solution' (and I use that term very loosely) has been worked out. That is, until the next portion of the 'web' develops a 'tangle'. On the shorter term, since May of 2011, the Euro has been in a downtrend EUR/USD Forex Cross Daily Chart since May 3, 2011

A fitting picture. As that blog entry pointed out, Europe is truly a 'web of debt'. How is this playing out with the Euro? Note the following chart the Euro as an index against all other currencies Euro Index Daily Chart since May 3, 2010

When European concerns hit the headlines, Gold, Silver and to a lesser extent, the U.S. Dollar Index all do well. Equities do poorly. None of this took place in a corner. Everyone saw it coming and so many politicians just dismissed concerns with a wave of "oh, it'll all work out" because they had standardized their deviations. Personally I expect Portugal, Italy, Ireland and Spain to play out exactly as Greece played out. How many times did we hear a 'tennis match' of commentary on Greece across the airwaves? "Greece is saved!" "Greece is in trouble!" "Greece is saved!" "Greece is in trouble!" "Greece is saved!" Rinse, repeat. It's been going on for over a year, and I

We are basically sideways since the time that Greece's debt problems began to take center stage on the worlds
2 Exact Link - http://www.ftense.com/2011/09/europeanweb-of-debt.html

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expect the other P.I.I.G.S. countries to follow this same pattern. A market acquaintance of mine recently provoked a morose 'laugh' from me when he said: 2012 will be the start of a carnivale of stupidity and the EU is hosting the show. At the moment, the United States actually has positive economic data. Rather than repeat all of their work here, I will say that Matt and Brent have been doing good work over at MacroFuge3 pointing out verifiable data along these lines. However, as 'crisis points' occur in Europe, all of the data that we have to date states that U.S. equities markets (stock markets) will suffer during such time periods. If positive (allow me to stress that word 'if'), positive economic data proceeds to flow from the United States? Then such downturns in equity prices based on panic in Europe could possible provide wonderful buying opportunities for companies on the U.S. Stock markets that have good balance sheets. If such opportunities present themselves, you can be sure that I will detail such thoughts within the future pages of this newsletter. Shipping Finance Limited (SFL) Automatic Data Processing (ADP) NYSE Euronext (NYX)

So you shouldn't be surprised to see me focus in on these stocks in future issues. In addition to the above stocks, I am always on the lookout for other stocks to add to my watch-list. At the moment, a few stocks have caught my eye for the purposes of this newsletter for purchases for the Model Portfolio Dividend Stock #1 Waste Management (WM): Their EPS isn't the greatest at the moment. It's not exactly 'poor' at 2.05, but it isn't a Coca-Cola (KO) EPS of 5.44 or even a Johnson & Johnson (JNJ) EPS of 4.1. This is mainly due to strategic acquisitions that Waste Management (WM) has initiated. Waste Management (WM) Daily Chart

Dividend Investing Outlook

Ok. We are now beginning our endeavor, so at the present time, we have no dividend bearing stocks in the model portfolio that benchmarks the results of this newsletter. Let's begin with listing my 'watch-list' of stocks that I keep an active eye on Coca-Cola (KO) Johnson & Johnson (JNJ) General Mills (GIS) Waste Management (WM) Pepsi-Cola (PEP) Procter & Gamble (PG) Abbott Labratories (ABT) Pfizer (PFE)

Waste Management (WM) has consolidated nicely for the last five or six trading sessions, and begun to break higher. This is a nice buy entrance pattern. Or, if someone already owns Waste Management (WM) (as I do), then they could purchase some more at this point. Personally I would wait to watch the open. If we break higher than $31.95, then I would buy a position here. If we do not break higher than $31.95 in the first hour

3 Exact Link - http://macrofugue.com/

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or so, then I would wait. Wait to see if the support of $31.40 holds. If it does, then I would wait to see if 'congestion' at that $31.40 level holds, and then if the market begins to break higher. If it does begin to move higher out of $31.40 congestion, then I would buy / or buy more of Waste Management (WM) when it begins to break higher out of such possible congestion. If the market breaks lower than the $31.40 region of support, then I'd wait. Wait to see if the $30.90 region of support holds. Again if it does hold, then I would wait for price 'congestion' to form. Once the market began to break up out of any such congestion, I would put a buy order in above the highest high of the previous two hours. Position sizing, remember, is everything. For an account the size of the dividend investing 'sister' account of the Model Portfolio detailed at the end of this newsletter? I would consider only purchasing 5 shares. This is slightly greater than the 3% rule but this is with the thought that the trading sister will soon be adding cash to the other sisters, as we begin to make trading gains. Dividend Stock #2 Pepsi-Cola (PEP): Technically, Pepsi-Cola (PEP) presents a very similar picture to Waste Management (WM). We've pulled back recently, and have begun to consolidate in the $63.00 region. And I like to buy a stock when it begins to break up out of consolidation after pulling back. Pepsi-Cola (PEP) Daily Chart However, fundamentally, Pepsi-Cola (PEP) is in a better position than Waste Management (WM). Their EPS is 3.99 and the P/E is still 15.86. As with Waste management (WM), a pullback would not surprise me. The first level of support that I would watch would be the $62.50 region. There is a nice level of support their on the one hour chart. If we pulled back to this area, consolidated, and then began to break higher out of such congestion I would look to initiate a position. If the $62.50 region does not hold, then I would simply wait to see if the $61.50 region of support holds. For an account the size of the dividend investing 'sister' account of the Model Portfolio detailed at the end of this newsletter? I would consider only purchasing 4 shares. And again this is slightly greater than the 3% rule. Yet I hope to begin pouring cash towards the dividend investing 'sister' soon from gains from the trading 'sister' account. If I were to have to choose between buying Waste Management (WM) and Pepsi-Cola (PEP) for a portfolio? Myself? I'd probably go with Pepsi-Cola (PEP) based on the fundamentals. Dividend Stock #4 General Mills (GIS): This is a stock that I truly believe will break above $40.00 and 'then some'. I've personally held on to this stock for some time, and after considering the stock splits, my purchase price is somewhere near $36.34. General Mills (GIS) Daily Chart

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I'd personally buy more General Mills (GIS) on the same exact technical pattern as Waste Management (WM). Wait for a pullback. Wait for consolidation. Wait for a break higher up out of that consolidation. If I had to choose between Pepsi-Cola (PEP), General Mills (GIS) and Waste Management (WM)? Again, I would have to go with Pepsi-Cola (PEP) based on the fundamentals. Dividend Stock #5 Shipping Finance Limited (SFL): This stock I'm including purely as a higher speculative play. For the Model Portfolio? I wouldn't even consider touching this stock. There's simply not enough capital to make this play. I'll tell you why. I know the shipping sector. And although Shipping Finance Ltd. (SFL) on the surface is a well run company, with good looking financials and an absolutely incredible yield? It is run in not-sosilent partnership with Frontline Ltd. (FRO). And if you will pardon the pun, Frontline Ltd. (FRO) at the moment is a complete boat anchor. Shipping Finance Ltd (SFL) Daily Chart end of 2009 when a publisher ran another newsletter of mine. At the time, I was However, for larger accounts? I'm talking over $50,000.00 of cash available for dividend investing? I might consider taking 2% and buying some SFL if the technical picture unfolds with a mean reversion, as I have mentioned with GIS, PEP or WM. Namely, a pullback to support on the one hour chart and then consolidation with a break up out such consolidation Mind you this is a very speculative play. This isn't even in the same category of PEP, WM or GIS. And to reiterate I would not make such a purchase without at least $50,000.00 worth of capital. If the parameters fit for the purchase, you will not see such gains appear in the Model Portfolio of this newsletter.

Trading Outlook:
Note: By way of reminder, since the Model Portfolio has only $9,000.00 there will only be 'brief day trades' at this stage of the game for Commodity Futures trading in order to escape the risk of over-leveraged gap opens in the commodity futures markets. This is an attempt to demonstrate how account size relates to trading style. As the 'trading sister' reaches $30,000 I will graduate the account into 'swing-trading' and demonstrate how I would go about doing this. The Forex account has $50.00 and is considered a micro-forex account for the purposes of the model portfolio..

Commodity Futures Markets

Commodity Market #1 December Silver (SIZ1, YIZ1 for the Mini-Silver or the SLV for the imperfect ETF): My fundamental edge data for this market, is telling me to look for brief long, or buying opportunities. Companies in the shipping sector run with much higher debt levels than most other sectors. And when the debt crisis unfolded in 2008? Frontline Ltd. (FRO) got caught in a world of trouble, and had way too many vessels for demand. I wrote about this at the At the time of this writing, Silver is moving lower in the overnight Sunday hours. I would wait for Silver to approach the $34.45 region. I would wait to see if any congestion forms at that level.

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You will find that when it comes to market entrances? That's what I look for. If I'm going long, then I wait for pullbacks to key levels of support. Then I wait for congestion along that area of support. Then I wait for a break higher out of that congestion, and I go long. If the support does not hold? Then there is no trade. So as I was saying? For the next few days, I'll wait to see if $34.45 holds, and the market congests near that region for an entrance pattern. If $34.45 does not hold? Then I might wait for $34.21 for a similar entrance pattern. Obviously, if $34.21 were not to hold either? Then I would not take the trade. Commodity Futures Market #3 December U.S. Dollar Index (DXZ1 or the UUP for the imperfect ETF): My fundamental edge data for this market, is telling me to look for brief short, or selling opportunities. Any break lower than 76.97 I would consider for a short-term day trade for selling the Dollar Index Futures. If we begin to move higher, then the first level of resistance that I will begin looking for congestion to short, would be the 77.45 region. Obviously, Crude Oil is a bit 'bigger' contract. I do not feel that anyone should be trading the actual futures contract unless they have at least $40,000 in their account. Therefore, for the purposes of this newsletter and the model portfolio? We'd have to use the USO ETF, and buy put options. I'd want to see the market 'stall' a bit before purchasing any such Put option. If the market stalls, and forms congestion and you guessed it, then begins to break lower out of that congestion? At that point, I'd consider purchasing a USO January 39 Put option. I wouldn't stay in the trade any longer than a $125.00 stop / loss from my entrance. But I must reiterate that I want to wait for the market to 'stall' before attempting this trade.

Commodity Market #2 December Crude Oil (CLZ1 or the USO for the imperfect ETF): My fundamental edge data for this market, is telling me to look for brief short, or selling opportunities. Does that seem strange? The market seems to just rocket higher and higher. Well that's exactly the sort of scenarios I look for. Lately, the Commericals have been getting rid of their 'long' positions. Small speculators seem to be just piling on to their long positions as the market heads higher and higher. And we're facing a seasonal down-time in the crude oil market beginning within the next few days.

Commodity Futures Market #4 December Corn (CZ1 or ZCZ1): My fundamental edge data for this market, is telling me to look for brief short, or selling opportunities. I'd like to see the market pull up a bit, before trying to short this market. I also must say that when trading the grains, a trader must be very, very careful around the 'open' of active trading near 10:30 am est. I don't even consider trading the first 5 to 10 minutes of the grain active opens. It's much, much too volatile. It always has

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been this way, as long as I can remember. I basically wait to see if things calm down. Now as I was saying; if I see Corn prices climb a bit higher? Then I would look for congestion to short. Either around the 645.75 region, or possibly the 650.50 region. At those two areas? I would look for congestion. If the market then began to break lower out of that congestion? With a good 'tape'? I'd look to short this market. Commodity Futures Market #5 December Lean Hogs (HEZ1): My fundamental edge data for this market, is telling me to look for long, or buying opportunities. As with the Corn market? A commodity futures trader must be very careful at the beginning of active trading. Active trading begins with the Lean Hog market near 10:00 am est. Things can become very volatile near the open in the Hogs market. As with Corn and the other grains? At times, I just wait five or ten minutes to see how the open plays out. However, that being said I would like to see this market pull back just a bit. Say, to the 86 region. Possibly the 86.100 region. With congestion near that area, and then the market breaking higher up out of any possible congestion in that region? I'd look for brief day trades to the long side. Remember all of these trades would be dependent on my trading methodology (which I outline in my trading methodology series on Youtube, which is still available), which means that I'd have to see a good tape. Until November 30th? I will be using my twitter account ( http://twitter.com/Airelon ) to specify my thoughts on each of these markets, as they happen live. After November 30th I'm going to see about including live updates via the website that I will be in the process of building.

Forex Markets:
At this point, I have no Forex trades to mention. However, you will note that the Model Portfolio does contain a small portion that is dedicated to Forex trading. What are my thoughts when it comes to Forex trading? Commodity Futures I know, and I know well. I've been trading commodity futures for 15 years now. This experience has gained me valuable insights, and the understanding of how to trade these markets profitably. I will not engage in deceit and pretend to be the worlds greatest Forex trader with vast amounts of experience. However, I have been applying my 15 years of general experience of trading, to Forex trading for long enough to feel that I have some insights to share, as well as trading thoughts. But since my Forex experience is not as great as my commodity futures trading experience, you will note how this fact impacts itself on my portfolio. I am not going to reserve a large amount of capital towards Forex trading, since my experience does not lend itself to this. I am only using a small micro-forex account in the model portfolio. This I feel is an important lesson. It is important to marry one's experience level to the 'weight' that particular activity has in ones portfolio.

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Summary of the Hypothetical Model Portfolio

Note: In the beginning of this hypothetical portfolio, the share purchases of the Dividend Investing 'Sister' will be extremely small. It is my intent to demonstrate how to grow the size of these positions from 2 shares, to 300 shares using the three sisters portfolio management style.

Savings Side-Pocket Account Balance: $2,000.00 $500.00 for a Slush fund / Drawdown Kill Switch fund $1,000.00 for a Base Savings
Percentages of that Cash:

This is the very first week for the Model portfolio that benchmarks the results of Aileron Market Balance. There are thus no trades with which to update our Model Portfolio. Thus, what is listed below are simply the balances that will mark the beginning of this endevour. Investing Account Balance: $4,000.00 Cash: $4,000.00
100% of Account

$805.00 of this cash reserved for 'burn rate / maneuvering' capital ( 80.50 %) $120.00 of this cash reserved for CD Ladder creation ( 12 % ) $20.00 of this cash reserved for the first side-pocket purchase ( 2 % ) $20.00 of this cash I reserve for the second sidepocket purchase ( 2 % ) $35.00 of this cash I reserve for the hedging account ( 3.5 % )

$500.00 for Emergency Savings Getting Paid Fund: $0.00 Redistribution to Other 'Sisters': $0.00

$500.00 available from Slush Fund

Stock / Futures / Forex Trading Balance: $9,000 Commodity Futures Balance: $8,950.00 3% risk tolerance gives us approximately $268.50 for my drawdown tolerance. $500.00 available from Slush Fund Micro-Forex Balance: $50.00 3% risk tolerance gives us approximately $1.50 for my drawdown tolerance. $500.00 available from Slush Fund

That are my thoughts as they exist this very early Monday morning. Until next time, stay safe trade well, and remember that loving other people doesn't cost a dime.
Note: The above statements should not be construed as an investment or trading recommendation. Aileron Market Balance is a newsletter that allows subscribers to look 'over my shoulder' as it were, for my own personal specific trading and investing ideas and thoughts for the next week. But they are only thoughts as of the moment of publication, and are subject to

change. Any trades or investments that I discuss within this newsletter are simply my own thoughts regarding my own investing and trading outlook. Remember that entering any market is an individual decision. There is no guarantee that I will enter, or have entered any of the trading or investing ideas that I discuss in this newsletter; as larger accounts may

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require a different strategy as the ones presented here. This newsletter simply contains my trading and investing thoughts for the next week. I, the author do not grant this work for wide distribution beyond any single individual subscriber as this publication is protected by U.S. And International Copyright laws. All rights reserved. No license is granted to the user except for the user's personal use. No part of this publication or its contents may be copied, downloaded, stored in a retrieval system, further transmitted or otherwise reproduced, stored, disseminated, transferred, or used, in any form or by any means except as permitted under the original subscription agreement or with prior written permission. I personally only enter any market after watching and reading the tape and I trade using money management principles. The losses in trading can be very real, and depending on the investment vehicle and market, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 15 years of experience in trading and investing in these markets. The Model Portfolio accounts are hypothetical accounts,with all of the inherent problems therein, which are used within this newsletter in an attempt to track the results of this newsletter, and is run for the education of other traders who should make their own decisions based off their own research, due diligence, and tolerance for risk. Any pictures used within this newsletter are believed to be public domain. Any charts that are displayed using the ThinkorSwim platform, and other pictures were obtained through Wikipedia's public domain policy.