Specialty Plays

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Trade For Wealth™ with Oliver Velez * www.olivervelez.com * Copyright 2012

October 24, 2012

Dear Level 3 Wealth Trader:

As many of you know, my style of wealth trading is rather conservative,

and I use that word in its most literal sense. To be conservative is to be

traditional, or better yet, to be cautious to change. It’s no secret by now

that I rarely change the blue-blooded wealth stocks I play. In some caseslike IBM, MCD, and MRK, I’ve held wealth positions for over 21 years.

And others like AAPL and AMZN have been held and traded for over 7

years. To my way of thinking, there are not many stocks out there worth

holding “forever,” despite the fact that there are in excess of 15,000

equities that trade each and everyday. Sure, there are scores that are

worthy of being traded , but not many worth being made a family member,

for life. That category is rather rare and I limit most of my wealth activity

to this precious group.

However, every now and then, I do come across what I call “Specialty

Plays,” unique plays which characteristically fall into two groups or

categories:

Category 1: These specialty plays are just outside the pure “wealth”

group. They may not fully meet the “forever”category, but they are

traditionally companies that have a worldwide, recognizable name, or at

least are on their way to having one. They are innovative, cutting edge,

and dominant in their industries in one way or another. They may not be

number one or even number two in their respective fields, but they are not

going anywhere. They are forces to be reckoned with by their competitors

and everyone knows they are here to stay. They are tenacious fighters and

although they get into trouble during periods of their life, the world knows

they will eventually figure it out after a while.

Category 2: I also, from time to time, come across what I deem as a

“pure” Specialty Play. This is not a wealth play by any stretch of the

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imagination. These plays are not like their category 1 brothers mentioned

above. They are not wealth plays and what’s more, they are not even close

to being wealth plays. They simply are temporary visitors to my overall

wealth world and are treated as such. While I can’t say they are swing

trades (up to a couple of weeks), they won’t usually be held for very long

periods of time, and once they are eliminated (hopefully in profitable

territory), they are usually not visited again for a very long time, if ever.

Today, I will be sharing with you the next two specialty plays I will be

initiating very soon, one from each of the two categories above.

Specialty Play 1 (Category 1) - Yahoo Inc. (YHOO)

Yesterday’s action in Yahoo Inc. (YHOO) produced an “igniting gap”

that “cleared” nearly an entire year of prior price activity. This is a very

bullish development. You have all heard me profess over and over again

that when a stock finally accomplishes something it hasn’t been able to do

for a very long time, it’s time to take notice. Well, yesterday’s trade action

in YHOO called for that.

Every time I decide that it may be time to take notice of a potential new

wealth play (in this case, specialty play), I like to take a quick glance at




the monthly time frame. This longer term view of YHOO shows a stock

that has been been basing and prepping itself for a substantial rally for

nearly four years. The time now seems ripe for a change and I feel that

change is upward in a big and enduring way. Notice how the 20ma on the

monthly chart has gone flat and is now one with the stock. Notice also

how YHOO has not been able or willing to make a new low since 2008.

Gee, we ar e practically in 2013. In truth, it’s the clearing of $20 that is the

true key area that signifies enduring change for YHOO, but I always like

to get in before it’s obvious and crystal clear to the rest of the world and I

will do so in this case. Below is my strategy.

Buy Strategy for YHOO:

I will look to buy an opening position of 3 lots of YHOO whenever it

trades above $16.80 intra-day. In fact, I’m going to place a “buy-

stop”order at $16.81 so I don’t even have to think about it. Once in, I will

place a hard stop on the whole position at $14.55. That’s a wee bit morethan a $2 risk for what can easily be a double (100%) or more. Let’s not

forget this stock once traded as high as $125. A bounce from its lows to

$40 or so is not much to ask.

Specialty Play 2 (Category 2) - 2x VIX ETN (TVIX)




This is not the time nor place to get into the intricacies of how the Chicago

Board Options Exchange Market Volatility Index (VIX) is calculated, nor

is it the place to talk about the myriad interpretations of how this index

should be read, used or traded. Simply put, I’d like you to look at the VIX

as a basic “ Fear Gauge.” The goal of the index is to measure the implied

volatility of the the S&P 500 Index over the next 30 days annualized. So if

the VIX is at 19, it expects an annualized change in price of the S&P 500

Index of 19% over the next 30 days. But enough of the bal...blah...blah.

Here is the most important point I want you to understand about this

index: Only when investors perceive neither significant

downside risk nor significant upside potential will the VIX be

low. And based on the historical chart of the VIX ETN below, what

position do you see? A VIX reading that is historically high or low?

Low...of course. EXTREMELY LOW!

The VIX is at historical all-time lows which suggest that market

participants have no clue as to what to expect in the near future, up

or down. They are baffled, confused, thrown and don’t know how to

plan or prepare. In my experience, when the majority is stumped,

and is more prone to stand still until things become clearer, the

market will take off in the most violent way to ensure it leaves most

behind, doing what they were doing...thinking and waiting. The

market wall always find a way to do what the majority is notexpecting.

Change appears to be ripe for the VIX and enduring change at that. I

see action that suggest that the VIX has seen its final low for a long

while and that its future has more of a bias upward than downward

and I want to profit from this. With that being said, my strategy for

playing the VIX to the upside appears below.

Buy Strategy for Daily 2X VIX ETN (TVIX):

The vehicle of choice I’ve chosen to use to exploit my view that we will

soon begin to see an enduring trend to the upside on the VIX is TVIX. This

particular instrument attempts to deliver twice the movement of the actual




VIX, making it an instrument that could deliver double the bang expected,

if my views are right. I’m a bit early but will start nibbling by buying 3

lots of TVIX the moment it trades above $1.77. This could take some time

to accomplish or it could happen fairly quickly. Setting a “get ready” alert

at $1.70 is what I’m doing to ensure I don’t miss the opportunity. Once

I’ve established my opening position, I will place a firm protective stop on

the entire position at $1.20. Now, from a percentage basis, this is a big

stop, but when you’re playing an item in such a low priced range, you

refrain from looking at percentages as much as you do sheer price. The

risk is less than 60 cents. But our upside potential over time is 150% or

$2.73, in my view. I’ll risk less than 60 cents to potentially capture $2.73

cents any day of the week.

A quick view of the weekly chart below shows that I ’m a wee bit early, as

TVIX has yet to establish a true, flat 20ma, like YHOO has. But I’d rather

be a little bit early (because of the low risk) than a little bit late in this

case. The first time TVIX blips above the weekly 20ma will be a key

accomplishment. I’ll be monitoring this for sure.




So there you have it: My two newest Specialty Plays. Of course I reserve

the right to be wrong, but as you all know, while at times my plays can

take some time to shape, I’m not wrong very often. I’m truly excited about

the potential in both of these opportunities and while they can’t beclassified as traditional wealth plays, I feel they have the characteristics of

many wealth plays in terms of what they can deliver. You have in detail

what I’m going to be doing. If you regard that as your marching orders,

then I guess we will be in these together. That’s a nice thought....together .

Specialty Plays

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