Upcoming Trades

Got a few trade set ups going into next week (though some of these may take longer to play out).

First is in Corn. We have a bit of an inverse head and shoulders formation, and you’ve got commercials opposed to speculators. Given the size of the formation i prefer the may contract as opposed to march. entry would be 673-683 depending on your desire to be in early or late. its a 80-100 point formation for targeting. You can check out the chart here

next up is GBP/USD. someone could play the futures market if they like, entry point is about the same. similar set up with divergence and commercial/spec divergence. buy point is 1.581 chart here

 In the S&P: We have two down days in a row with 10 day %R below -20–this gives us a buy set up if monday trades above todays high. Larry williams found this to have over 90% accuracy. If monday opens lower then we can short that into the close with 85% accuracy via Jake Bernsteins research.

Finally, if we have a negative monday then we will have three down days in a row which gives us a short term buy till a profitable close. this set up should provide us with at least one highly accurate trade. We should note next week is the last week of the month which should, overall, provide upward bias.

 

ABC the MACD Way, in Real Time

I did a post a while back on how i try to quantify elliot wave theory using momentum indicators to help with counts.

In general, the idea is that if you get three waves without a divergence, then you’re looking for a continuation of the trend. However, if you get a divergence there, then its an ABC correction. If you get 5 waves and the 5th wave creates a divergence, then you look for a trend line break and then an ABC move in the opposite direction.

elliot wave enthusiasts are sure to burn me at the stake, but this is the only way i know how to be decisive about these counts. This is a screen shot of a 5 minute chart and how i traded MY EWave set up.

so on the rally up we had the wave 3, as opposed to a wave C because there was no divergence shown. this means the dip should be bought and the next rip should be sold. I watched the trend line of this rally break and shorted it, then as we got the ABC reaction i was looking for i covered.

This is where most guys stop and say; see, look how awesome i am at predicting the future! Im going to go one step further and show why EWT ends up with 5000 opinions on every chart. This is a shot of what happened next.

I closed my trade not because i feared my count would be wrong. Just the opposite, i got that king kong feeling that i could just rule the world. My count was right, i had mastered EWT in a way all these other hacks couldn’t, and i just knew the market was going higher.

So i sat on my hands. Thats a lesson much more important than following wave theory or using indicators the way that i do.

“It was never my thinking that made the big money for me. It was always my sitting. Got that? my sitting tight! it is no trick at all to be right on the market. you always find lots of early bulls in bull markets and early bears in bear markets.Ive known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”

- Reminiscences of a Stock Operator

 

Unbroken Bond; Part II

In the previous post I mentioned the monthly RSI and the long term chart of bonds. In this ill drill down into some longer term bond themes that can help hone the trading potential of long term bond trends.

To start with I failed to mention the 62 month price channel for $TNX. I intentionally did so  because i fear of data mining and curve fitting. That being said, this channel has held the last two secular cycles in bonds. Currently the height of this is 5.25% on the 10 year bond.

To put tighter constraints on our near term projections of this market i suggest the 9 month 2 deviation bollinger bands. In secular bull markets for bonds, we want to look for yields ($TNX) to be in the upper range of the bollinger bands and above 50 on the monthly RSI. This is a general set up–not a signal. From there you’ll look for buy points in the bond market, using trend line breaks or whatever else it is that you use. In secular bear markets, we will look for price in the lower range of these bands and RSI below 50.

Drilling down to the weekly charts for a stellar trade; when the yield ($TNX) has its RSI touch below 26 short the 10yr bond for a 10% move–this works 92% of the time–though it is rare. This is also a great market timer in stocks, as the stock market is a buy for at least 1 month when this occurs. In general when the weekly RSI is at extreme levels, below 30 or above 70, one should look for a reaction in the stock market. This reaction will be based in part on if we are in a secular bull/bear in bonds.

Another nice trade for “picking bottoms” in equities is to look at the 12 month ROC of 3 month Tbills, as we can see here. When the ROC spikes above 5 its time to look for buy signals in the equity markets. Theory being that once everyone runs to cash it creates buying opportunities. I like this at the very least for a set up.

In addition, Edison Gould observed that since the creation of the fed, “Whenever the Fed raises either fed funds, margin requirement, or reserve requirements three consecutive times without a decline, a top is near in equities.” The average pullback was 17% with 87.5% accuracy since 1915. I really have no idea how this plays in a Q.E. environment, but its long term accuracy is at least worth making note of.

Moreover, we now have price and momentum indicators for these long term secular trends in the RSI and donchian price channels. We also have a narrower range for intermediate term expectations in the monthly bollinger bands. This coupled with how to trade bonds and equities when bonds move aggressively in one direction or the other and how to trade short term rates gives us a nice foundation to build upon.

 

 

 

An Unbroken Bond – The Secular Trend in Fixed Income

“Discovery consists of seeing what everyone  has seen and thinking what no one has thought”

-Albert Szent-Gyorgi

I often think I’ve seen too much as a trader. From the horrid selling tactics of the financial industry at large to the unintended misleading information that exists within the system. The cynicism becomes systemic. So much so that we as traders often end up believing in nothing and no one. It is with that cynicism that I continue to think the missing link for most market participants is how to quantify long term trends. This is my way of quantifying the long term trends in treasury bonds.

Using the 10 year treasury interest rate, $TNX, we are going to focus on the Monthly bar chart and hone in n the RSI 14 indicator. this will be for the purpose of analysis–not trading. The thing one must take note of is that the RSI does not hit 70 when bonds are in a secular bull market. likewise, it does not hit 30 in a secular bear market. the problem with such long term indicators is that when bonds bottomed in 1981, it took till 1986 to signify bonds were in a bull market. when bonds topped in 1946 it would have easily taken till the early 1950′s to signal a long term shift.

Now, if i was reading a post of a guy talking about a 4-5 year lag id tell him to go stand under a falling tree (actually, id say something far more graphic). So before you have the same reaction, make note that these turns did show divergences in the RSI and if i were actively trading it i would look to other things. In addition, look at how long these trends are.

(source: Barry Ritholtz via Biancco Research)

We are talking about 30-60 year trends! For the sake of analysis, a 4 year lag isn’t all that much. it would be like having a 50 day lag in a 2 year trend.

The goal of this analysis is to help people from their own ego’s. To call a top in a market that can trend for so long can kill an account. Even Bill Gross–”the bond king”–couldnt turn this trend around. He got out and the market proceeded to move 20+% in the opposite direction. Now clearly someone moving that much size can’t wait for the turns that I’m talking about.

For the rest of us, wait for the turn, you’ll have over 20 years to bank on it. Hopefully this will help others think what no one has thought before.

(following bond post will expound upon this concept and break down how i think this information can be traded)

 

More Secular Cycles in Equities and R.E.

the following charts will be supplied by JP Morgans quarterly market insights and calculated risk

In an attempt to get back into the groove of writing i will stick with the big picture and post what i believe are some fascinating charts (might even say something smart in the process)

 

 

 

 

 

 

 

 

the real 10yr treasury yield gives us another great view of secular bear markets. In the previous cycle the nominal rate was headed higher, yet it had broken below zero on the real rate. We’ve seen the same thing happen here once again. Though history doesn’t have to repeat itself i would suspect that once we get back above 0% on real rates that there will be one more push below to negative real rates before this is all said and done.

 

 

 

 

 

 

 

 

Here is another exciting view of the same thing happening only this time using trailing P/E ratios. many would argue the technology/bio tech sectors have adjusted this and we can no longer use historical P/E ratios. I might even accept the argument–in theory. However, we are seeing this pattern play out where secular bear markets crash and chop the markets up while value is still being built. Will the age of value investing make a comeback?

 

 

 

 

 

 

 

With a perfectly seamless transition to the housing market, we’ve actually seen home prices  come back to baseline. How about that? Would have to assume that it isn’t the worst time to buy a house. That being said, i still don’t like the price to rent ratio.

 

 

 

 

 

 

 

nor the price to income ratio

 

 

 

 

 

 

 

While it isn’t impossible to see home prices rise in this environment, i continue to believe that until we get further drops in home prices or a rise in incomes/cost to rent that the housing market will struggle to find a “real” recovery.

as a parting summary, Americans can at least feel glad that we werent/arent the only country with a housing bubble

 

Rollin’ Down Tha River

A new perspective on secular (long term, 15-20 years) cycles was presented to me via Barry Ritholtz and thechartstore.com and i found it an opportune time to beat this dead horse one more time.

Typically when talking about these cycles ive brought up price charts, momentum indicators, even just the eye ball test. This chart brings a different perspective of rolling 20 year rates of return.

To my way of thinking this is one of the coolest views we have of secular trends. It shows so clearly that when those in the industry of finance preach,”getting in the market at a young age, average down, buy the dips, the average rate of return is 8% etc.” that it is nothing more than a lie. a cruel attempt to keep commission streams consistent.

Ranting aside, this shows once again that we are in a secular bear market in equities, and it should continue for at minimum another two years and perhaps as much as seven. This does not mean that prices cannot go higher or that the economy cannot improve from here. What it means, to my way of thinking, is that more pain is ahead. that of which no policy can fix, only time. The markets could chop sideways, crash, rally and crash–i can’t really tell you how it will happen just that i continue my belief that it will happen.

for now one must either be very active, or learn to roll with the punches.

 

Wiley Coyote

I’ve been thinking a lot lately about the concept of “chasing markets” and how undefined the concept is. It reminds me of when people would tell me to “buy on a pullback” without any clear definition of what that was. After solving that problem, i ask; what is chasing and how do we know when we are doing it?

As a buyer of breakouts ive come in contact with many people saying im chasing prices. Yet ive been planning on buying at that price–if the market got there–for days if not weeks. This doesnt feel like chasing to me. Thinking back to when i was a child, i certainly did a lot of chasing. Be it girls, a simple game of hide and seek, we all chased someone. What i recall, is that it was fun, exciting, and at the heart of it was never calculated or methodical. We just did it.

Anticipating and then trading a breakout is quite boring if you ask me. Waiting for price to get below $X is pretty boring as well. But is it chasing? i remember when i used to trade based on fundamentals exclusively. Wow, when prices “dipped” and i thought i was buying the best dip of the century, id jump right in front of that moving train and i had a thrill of a time. I was excited to finally enter, the fact price kept dropping also added to the excitement. I was chasing. Worse yet, i was Wiley Coyote. i chased till the rug was pulled out and i noticed i was hanging on the edge of a cliff with my feet still moving.

When it comes to trading, chasing really is a feeling, not a specific action or event. It can happen any number of ways. Market could be in a range and you decide to guess which way it goes before the breaking–youre chasing. Youre getting impatient and jumping the gun. if the market pulls back, you might decide to buy midday of a huge trend day down, as opposed to waiting till the close–youre chasing. If the market rallies and youve been waiting for that pullback that “never comes” so you jump in out of impatience–youre chasing.

Moreover, i think there is a formula for the feelings one feels when they are chasing a market. i believe this formula comes down to:

Impatience + excitement – discipline = chasing

This will apply virtually independent of what the market is doing and focus solely on what the trader is doing–the way it should be. With this formula we might begin to advance our understanding of what chasing really is and when we are doing it. Hell, we might even make some money off of it.

Just because youre running, doesnt mean youre chasing something.

 

A Wall of Worry?

The S&P seems to have climbed itself into a rising wedge, typically called a bearish wedge. We can see price, rate of change, and average true range narrowing off all that the same time. However, ADX has been broadening and rising throughout the formation. I dont think this invalidates the formation but i do think it will invalidate the move that follows it.

What i mean by that is if the market breaks above the formation, it will probably be short lived (blow off “top”). It would have to hold above that upper trendline and thats just too steep (even for a bernanke put). And if it breaks lower, i would expect a consolidation to follow before a move up or down. If the formation does play out, its at least 75 point implication (5.6%).

Other charts to focus on–in my opinion–are the bonds and the dollar

We can easily see the potential divergences in the bond market. my inclination would be to say money starts flowing into bonds before they go out of stocks. However, we have seen bonds go down while stocks rise. What Larry Williams calls the jaws of death. Following this is the potential reversal in the dollar.

the 16 wk channel has worked pretty well, especially when youve already had the 13wk EMA cross the 26wk MA. so a weekly close above 81.5 would look to do the trick.

And finally, the VIX.

This is quite simple really. just break the 40 day channel that has held this downtrend and it will have changed its nature. Most other indicators are somewhat flawed with this market but ATR and ADX are quite low, so its at least set up to move a bit.

This isnt a call for a bear market. in fact, the S&P 500 would have to break down below 1020. But collectively, these markets look ready to reverse in an intermediate term basis.

 

Follow The Money

Rarely do i bring up taxes and politics on this blog. Reason being that just about any fool can swing about an opinion, arrogantly feeling as if their opinion should be factual knowledge–and get away with it (yes, perhaps thats what blogs are for). I prefer facts, charts, and lessons of history. I shall attempt to dance between these two, throwing about my opinion within the midst of a few charts.

Follow the money, tax the money, and all else be damned.  Too many people claim that raising taxes on the wealthiest people in America is “distributing the wealth”, “socialist”, “the devils work”; i laugh–these things have already happened. Ironically, theyve happened due to lower taxes. Let me explain.

The concept of lowering taxes to boost economic growth is that individuals can spend their money better than the government can. This in turn, allows people to pruchase more assets. The problem is that the very wealthy own an extremely imbalanced amount of the assets. They now share less of the tax burden than of yester-year.

As we see above the tax burden of the top 0.01% of americans from 1960 till now was cut in half. Meanwhile, the top 20% is almost neutral. The wealthy were given more money to purchase assets–so they did. Asset prices rise, and then you get this next chart;

 

What we have seen is a distribution of the wealth–UP. And in a world where asset prices were allowed to fully boom and bust one might say that the wealthy are taking on such great risks, and eventually the market will find them. Trouble is, we now have a government that has made it its goal to stabalize asset prices using ALL of the publics money.

We have distributed the wealth to the top and socialized those gains. You see, by cutting taxes we have actually created the enemy that has been feared for so long. As we tax cut and spend, we risk inflaion to commodities like food and energy. For the poor, this strips them of any chance of holding assets because all of their income is tied up in survival. Meanwhile, this effects the wealthy less so because they can simply shift asset money into survival money.

It is not an ideologial whim to say that we need to extract money from those who have it. Specifically when the increase of expenses (debt) has gone to benifit them the most. It is simply all there is left to tax. As long as we hold asset prices up, stoke the prices of basic goods, the less well off will not be able to pay any more taxes. The simple math is there, we must follow the money and tax it. I know, i know, im advocating to distribute the wealth.

Damn right i am.

All in all, we have cut the tax burden for the wealthy, vowed to stabalize the price of their assets, and will continue to ask the bottom 80% to kiss their savings good bye with higher commodity prices. If that doesnt sound like distributing the wealth–then i dont know what does.

Welcome to 2011

“It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

-Adam Smith, Wealth of Nations

 

Home on the Range, Part 2

Here we are looking at the past year in the S&P500 followed by what has happened in the jobless claims for the same time period.

For the past year both of these charts have stayed–more a less–in a range. We now find the S&P500 with low trend and narrowing volatility (check ADX). This has been accompanied by lower and lower volume as confusion and indecision has set in. Furthermore, notice the beauty of how all of that volume has concentrated itself within that range.

Its ready for a move.

Accompanying it is jobless rates stuck between roughly 450 and 500. A move beyond either of these could spark movement within equities. Certainly if the 4 week MA moves beyond this range.

Crude oil is also picture perfect range. Breakout attempts in each direction have failed, which is exactly whats happened with the S&P.

And Copper joins the party as well.

What we see within these charts is that they’ve had smaller patterns within this larger range. Copper’s break out of the triangle formation has still yet to get out of this larger pattern that has taken hold.

One last look, S&P500 weekly, past 3 years

Here we have it. volume hasnt just concentrated in our range for the past year but rather the past three years! Everyone who has been around since the top in 2007 till now, the vast majority of them are concentrated in this area. A 900 point range concentrated into roughly an 100 point range. A cynical person probably wouldnt make note of the fact that this is all happening around the 50% retracement of this 3 year move.