Monday, September 12, 2011
By Guest Author
If there are any human traders still out there that happen to be reading this, the UK Foresight project team has some news for you : don’t expect to be trading for much longer. Here is what the report had to say: Read Paper Here
“It is reasonable to speculate that the number of human traders involved in the financial markets could fall dramatically over the next ten years. While unlikely, it is not impossible that human traders will simply no longer be required at all in some market roles. The simple fact is that we humans are made from hardware that is just too bandwidth-limited, and too slow, to compete with coming waves of computer technology.”
The UK Foresight project is a group of academics from over 20 countries who decided to get together and study the effects of computer based trading. Lots of familiar academics names appear in the report including the pro-HFT academic crowd of Brogaard, Angel and Hendershott. And lots of the same old, tired defenses of HFT appear in the report: no evidence that HFT increase volatility, liquidity has improved and transaction costs have been lowered. No doubt this report will be picked up by the HFT lobby and their friendly media contacts and waved around telling people that all is well in the stock market.
But the report does raise some major concerns. Two of which are feedback loops and market manipulation.
Six different types of feedback loops are identified: Risk, Volume, Shallowness, News, Delay and Index loops. You can read more about these on page 14 of the report but the bottom line is that many HFT systems are very similar and tend to react to each other when unexpected events occur. The report says:
“The direct link between market outcomes and the fundamental events that ought to act as anchors for valuation has been severed and replaced by a complex web of iterated and nested beliefs.”
“A liquidity shock on one venue that might have gone unnoticed if there was one large centralised exchange can now affect prices on that venue. In normal times, the aberrant price would quickly disappear as cross-trading-venue HFTs buy low and sell high. But in stressed times, the capital of HFTs may be limited, or the HFTs themselves may start to doubt the prices (as happened during the Flash Crash) and refrain from arbitraging. Real-money investors then start to mistrust valuations across the board, and the resulting pressures mean that HFTs no longer contribute to liquidity provision, which makes price divergence across trading venues worse still. And so the shock is transmitted through the network, and its effects are reinforced by positive feedback. Trades and transactions will happen at socially inefficient prices, and mark-to-market valuations can only be done to multiple and illiquid marks. Understanding how to avoid such situations, and to contain them when they do occur, is a topic for further research.”
They must be kidding? They just described how flash crashes happen and then leave it by saying they need further research on how to contain them. We will save you the trouble and all the hours of research with one simple word: Fragmentation. Without fragmented markets and multiple liquidity pools, the situation that is described above does not occur.
There is much more in the Foresight report but we just wanted to touch on one more subject they brought up: market manipulation.
“Negative effects on efficiency can arise if HF traders pursue market manipulation strategies. Strategies such as front running, quote stuffing (placing and then immediately cancelling orders), and layering (using hidden orders on one side and visible orders on the other) can be used to manipulate prices. For example, deterministic algorithmic trading such as VWAP (volume weighted average price) strategies can be front-run by other algorithms programmed to recognise such trading. Momentum ignition strategies, which essentially induce algorithms to compete with other algorithms, can push prices away from fundamental values.”
So, be gone human trader. You are no longer needed as now we have a system in place which has the potential to crash at any time due to feedback loops and where market manipulation “strategies” run rampant. And, luddite, don’t you dare complain or raise objections because technology is always good and always increases efficiency. Right?
by the trader
ECB will buy bonds and save Europe from going bust, or? As The Trader has argued, the Big Elephants in the room, are still “under control”. The crisis spreading to Spain with unemployment at +20%, youth unemployment at close to 50%, “hidden” local debt, further declines in property prices (and transactions) will be much greater than the Greek mess. In order to understand the full scope of the Spanish contagion, one needs to live in Spain, in order to understand the mentality of NEVER taking a Stop Loss.
Italy on the other hand, with Berlusconi guiding the country in these stormy waters, will end in a total disaster. Note, Italy is Spain, Ireland and Portugal combined….
ECB coming out to rescue? Sure, but they lack the fire power, or will Ben join the party? We clearly see what happened in Ireland and Portugal. Spain and Italy coming up, or is this time different? We say no, it never is different.
by Bespoke Investment Group
Below we highlight the year to date performance of the main equity indices for the 20 largest countries in the world (based on market caps). As shown, Europe's big three (Italy, Germany, France) have been nothing short of disasters in 2011. France is down 25.4%, Germany is down 27.4%, and Italy is down 32.8%. On the other hand, the decline here in the US of 9.1% year to date doesn't look all that bad when compared to the rest of the world.
Below is a more expanded list of 2011 stock market performance by country. While Italy is at the bottom of the list above, two other countries have done even worse -- Greece (-39.76%) and the Ukraine (-41.29%). Of the BRICs, China now leads the way with a 2011 decline of 11.05%. Russia is down 12.21%, while Brazil and India are both down roughly 20%.
See the original article >>
The September 11 commemorations stole the headlines this weekend, but they weren't the only sobering news in town.
In Europe, fears for Greece's debts got a boost from growing talk among German politicians that default may be in order.
Furthermore, in France, banks such as Credit Agricole and BNP Paribas, which are viewed as particularly exposed to Greek debt, are reportedly bracing themselves for a potential credit rating downgrade by Moody's.
With analysts hardly raving about US economic prospects either, Tokyo's Nikkei share index tumbled 2.3% to a two-year low. Wall Street stocks are expected to open lower later on too.
New York crude fell 2.1%, copper eased, the dollar gained 0.5% against a basket of currencies, hitting its highest since March – markets had a distinctly "risk-off" tone.
…which might have extended to crop markets were it not for two factors.
The first is the prospect later of the US Department of Agriculture's monthly Wasde report on world crop supply and demand which is expected to cut estimates for the domestic soybean and, in particular, corn crops, following a summer long on heat and short on rainfall.
Investors have been increasingly cautious ahead of data expected to move markets.
"Is the high in" for corn and soybean futures, Mike Mawdsley at Market 1 asked.
"No one knows for sure, but the USDA report will mostly likely give traders some fodder, bullish or bearish."
'Strong cold front'
The second is the prospect of further adverse US weather, an early frost, which showed no signs of letting up.
"Clearly the main issue this week is going to be the strong cold front which is going to bring a real blast of autumn into a good portion" of central and eastern America from around Thursday, weather service WxRisk.com said.
The high pressure formation "will be the largest and strongest since May".
"The frost risk for North Dakota, South Dakota northern Iowa Minnesota and Wisconsin is pretty high."
There were some Chinese import data for August, released on Saturday, for traders to factor in too.
For soybeans, of which the country is the top importer, imports fell 15.7% month on month to 4.51m tonnes, although the data was less poor on vegetable oil, with a drop of 1.4% to 690,000 tonnes.
Overall Chinese soybean imports this year have reached about 34m tonnes, down about 1.5m tonnes on the same period in 2010.
And there is also mounting talk over the degree at which South American growers will switch sowings to corn, thanks to high prices of the grain.
"Surging corn prices have raised concerns farmers in the US and South America may cut soybean plantings in favour of corn," Lynette Tan at Phillip Futures said.
'Demand remains stagnant'
Still, with the Wasde ahead, Chicago corn moved all of 0.25 cents, downward, to $7.36 ¼ a bushel for December delivery, as of 07:50 GMT (08:50 UK time).
Soybeans added 0.3% to $14.30 ½ a bushel for November.
That left wheat the best performer of the Chicago majors, adding 0.7% to $7.34 ½ a bushel for December delivery, looking for its first positive close in four trading sessions.
"The bulk of the weakness [in wheat] has stemmed from upward momentum in the dollar, but overall demand for spring wheat and soft wheat remains rather stagnant," Brian Henry at Benson Quinn Commodities said, also flagging the competition from Russian exports.
"There is talk of Black Sea wheat and corn pencilling a profit into the [US] south east."
Luke Mathews at Commonwealth Bank of Australia held out hope for wheat futures,
"A strong [Wasde] report may see prices rebound, particularly given that drought conditions continue across the US Great Plains, negatively impacting hard red winter wheat planting," he said.
Elsewhere, dry weather in the drought-hit US South over the weekend, and estimates from Pakistan that some 2m bales may have been lost to heavy rains, allowed a rebound in cotton, which added 0.8% to 112.78 cents a pound in New York, for December delivery.
In Asia, palm oil picked up, adding 0.7% to 3,072 ringgit a tonne in Kuala Lumpur for November delivery, on the back of firmness in oilseed peer soybeans.
But rubber lost further ground, shedding 1.7% to 362.50 yen a kilogramme, well below the February high of 535.70 yen a kilogramme.
Still, the tyre ingredient's "downside is limited due to tight supply amid heavy rain in Thailand, wintering in parts of Indonesia and stock replenishing in China", Ker Chung Yang at Phillip Futures said.
The week started off with a meltdown in Europe. They lost 4.35% on monday while the US markets were closed. When the US market opened on tuesday, it gapped down losing about 3%, made the low for the week, rallied nearly 6% from that low, then ended the week with another meltdown in Europe (-3.20%) closing about 1% above the low for the week. Economic reports for the week were sparse with positives edging out negatives four to three.
On the plus side: ISM services, consumer credit, the trade deficit and wholesale inventories all improved. On the negative: weekly jobless claims rose, and both the monetary base and the WLEI declined. For the week the SPX/DOW were -1.95%, and the NDX/NAZ were -0.35%. Asian markets lost 2.4%, Europe was -3.9%, the Commodity equity group slid 1.8%, and the DJ World index lost 3.3%. This week we have a plethora of economic reports and it’s Options expiration week.
LONG TERM: bear market highly probable
We have been posting every day, for some time now, “bear market highly probable”. What this means is that we suspect we are in a bear market, by the wave patterns, but it has not yet been confirmed by OEW’s quantitative analysis. The March 2009 to May/July 2011 bull market unfolded in five quantified waves. This is quite clear. We have counted these waves as five Primary waves, expecting this first bull market off the Mar09 Supercycle low to be of a Cycle wave degree. Historically Cycle waves can last anywhere from one (1973-1974) to thirty-three years (1974-2007). The shorter ones are typically bear markets, and the longer ones bull markets.
The recent two year bull market we have currently labeled Cycle wave . It should be followed by a Cycle wave  bear market which could end anywhere between 2012 and 2016. We are currently expecting either 2012 or 2014. Both are tech cycle low years, and 2014 is a 4-year presidential cycle low year. Fibonacci relationships suggest a potential low at three specific areas: 38.2% retracement at SPX 1102, (which we already hit exactly); 50.0% retracement at SPX 1018, (which is within a few points of the Primary wave II 1011 low); and 61.8% retracement at SPX 935. Currently we are targeting the Primary wave II low area. We’ll see how the market looks, technically, as it approaches.
MEDIUM TERM: downtrend may have bottomed at SPX 1102
The current downtrend, OEW has not confirmed an uptrend yet, started in early July at SPX 1356. We counted three Intermediate waves down into the early August SPX 1102 low, then a potential 4th wave at SPX 1208 in mid-August, and a potential 5th wave failure at SPX 1121 to end Major wave C. We then expected an abA-B-abC wave uptrend lasting about two months. Thus far the market has followed that scenario.
The abA wave unfolded with a rally to SPX 1191, a pullback to 1136, and then a rally to 1231. The B wave followed with a decline to SPX 1140. Now the ab of the abC appear to be unfolding with a rally to SPX 1204, then a pullback to friday’s 1148 low. What should follow next is a rally to a higher high than SPX 1231. We’re sticking with this scenario but we do see a potential problem.
Typically during this type of wave setup the market internals should improve dramatically. At the lows the percentage of stocks above their 200 dma dropped to 10%. This signalled an extremely oversold condition even for a bear market. Since that low the percentage had risen to 30%, then dropped recently to 20%. We would have expected a more significant improvement in the area of 40% to 50% during this type of wave setup. Thus far it has not occurred. Should the market internals continue to deteriorate it would indicate that the recent rally from 1102/1121 is not the beginning of an uptrend, but an Intermediate wave iv with Intermediate wave v underway now. We have posted this alternate count on the DOW charts. The next fews days of trading should clear up this situation.
Support for the SPX is at 1146 and then 1136, with resistance at 1168 and then 1176. Short term momentum is quite oversold. When we review the wave activity since the SPX 1121 low we find the waves to be quite similar. The length of the waves in the abA were: 70 – 55 – 95. Then after the B wave, the length of the abC have been: 64 – 56.
Should the recent SPX 1148 low fail to hold, and the OEW 1146 pivot fail to hold as well, then the similarity would have been broken and the alternate DOW count would come into play. This would suggest that Intermediate wave iv topped at 1231, and the market is now in a Minor 1-2-3 down of Intermediate wave v. Should the 1146 pivot hold support the market would have to rally above the 1176 pivot to turn the short term OEW charts positive again, and the C of the abC would be underway. Since the market closed at SPX 1154 on friday we should know soon either way. Best to your trading!
The Asian markets were mostly lower on the week for a net loss of 2.4%. India’s BSE was the only gainer.
The European markets were also mostly lower losing 3.9%. Switzerland’s SMI gained 1.3%.
The Commodity equity group were all lower for a net loss of 1.8%.
The DJ World index lost 3.3% on the week, and remains in a downtrend along with all the world’s indices.
Bonds lost 0.2% on the week but remain in an uptrend as 10YR rates made a new record low at 1.90%.
The 30YR yield ticked down to 3.19%.
Crude gained 0.4% on the week in what appears to be a choppy uptrend.
Gold has been quite volatile lately losing 1.4% on the week. We expected it to correct but this uptrend has been quite resilient. Silver, which has been lagging, lost 4.2% on the week.
The USD continued its uptrend in earnest this week gaining 3.3%. The downtrending EUR lost 3.9%, and the JPY lost 0.9%. The bullish 17-year Supercycle in the foreign currencies appears to have rolled over.
Tuesday kicks off a busy economic week with Import/Export prices and the Budget deficit. Then wednesday we have the PPI, Retail sales and Business inventories. On thursday the weekly Jobless claims, the CPI, the NY and Phily FED, and Industrial production. Then on friday Consumer sentiment and Options expiration. The FED has two speeches scheduled, at their headquarters, on thursday. First chairman Bernanke in the morning, and then FED governor Tarullo in the afternoon. The next FOMC meeting in on September 20th and 21st. Also, the G 7 is meeting this weekend. Best to your weekend and week!
Sure the market could crash this week and deservedly so, but it doesn't really matter because it's just a ride.
Frankly, I could not care less whether the S&P crashes back down below 666 or if it catapults its way to new heights north of 2000. At the end of the day, it's just a ride.
You see, the Market is like a ride in an amusement park. When you choose to believe in it, or take it too seriously, you think it's real, because that's how powerful our minds are.
The ride goes up and down and round and round, and it has thrills and chills and is very brightly colored, and it's very loud, and is fun, for a while.
Many people who have been on the ride for a while inevitably begin to question, "Is this real, or is this just a ride?"
Other people know the answer to that question, and they respond "Hey, don't worry, don't be afraid, ever, because this is just a ride," and the status quo mainstream HATES THESE PEOPLE.
"Shut them up! We have a great deal invested in this ride! SHUT THEM UP! Look at my furrows of worry.
Look at my big bank account, and my family. This has to be real."
No, it's just a ride.
But they always seem to hate the good guys who try and tell us that, and they let the demons of corruption and deceit run amok. You ever noticed that? Well, it doesn't matter, because ... I'm telling you, it's just a ride.
You can change your experience anytime you want. It's simply a matter of choice. Yes, it takes effort, work, commitment, and money. It's a simple choice between the greed/fear factor and having an effective plan of engagement.
The goal of greed and fear is to get you to put bigger locks on your doors, buy guns, close yourself off, and buy lock-stock-and-barrel into the latest headline manias.
The goal of adopting an effective plan of engagement instead provides plentiful opportunities, and views the Markets as one big fun-filled ride of thrills and chills. After all, it's a long ride with lots of ups and downs so we might as well enjoy and make the most of it.
Here's what you can do to change your approach and experience of engaging the Markets right now toward a better, more certain, and enjoyable ride:
Take all the money you spend on stuff you don't need each month and instead invest it in educating yourself on what it takes to put together an effective plan, or following someone you trust that already has one.
Either investment will pay for itself many times over and enable you to ride the Markets, forever ... with stable profits and peace of mind.
In case you haven't already figured it out, the above introduction was made possible by the comedian Bill Hicks, and was conceived from one of his stand-up routines prior to his untimely passing. In my view, though I do not agree with many of his views, Bill Hicks was sold short, and should have been an American icon.
The following is an unplanned commercial interruption of sorts. I'm sitting here chain smoking and nursing multiple tumblers of my favorite Emeril's (BAM) Big Easy Bold/Intense coffee, while continuously working like a dog at 2 AM following an entire Saturday filled with the same. You see, my wife is in London, one of my kids is away at college, and the other lives out of state. So it's just me and my two loyal dogs (that makes three of us) unencumbered, and left to our own devices. We're here banging away at the key board, the TV is on in background as a surrogate companion of sorts, and the three of us are chewing the rawhide, listening to round-the-clock recounts and previews of the forthcoming memorial services surrounding today's ten year anniversary of the 9/11 attacks. Without further ado, I trust you will find this spontaneous digression quite relevant to this features content, overall message, and intent.
If you have yet to see it, this latest piece of headline mania is being advertised rather heavily on cable television of late.
It's a brilliant piece of cohesive marketing, copywriting, and salesmanship, which effectively compels TV viewers to log onto a website to view a free online video that promises to protect you from the looming "End of America." You can view the essence of the fear laden commercial here on YouTube.
I must admit, it is worth watching the first 10-15 minutes of this otherwise extremely long-winded sales pitch. Beyond enjoying the artistic production value of this genius presentation, upon further research, I have concluded that all this amounts to is just another real super-slick infomercial, which leads you on a perpetual journey of sales pitches working their magic at selling you an endless inventory of vital inside information that will save your financial life. Hicks would have crucified this piece of genius, and rightly so.
After an hour or so of research, the last two threads I found below were the straws that broke the camels back in arriving at my conclusions. Here they are:
- In my opinion, it is a good thing to use your mind instead of your emotions when approaching any type of investment. The use of scare tactics is very troubling to me. There are a few "buttons" that are utilized when attempting to motivate people to do things that may be against their better judgment...Politicians are famous for them. Fear and greed are among the most effective. The video is very effective because anyone with just a little bit of common sense realizes we are in huge trouble with our economy and it continues to get worst on a daily basis. Most thinking people feel that they should do something. Mr. Stansberry is astute enough to realize this. My last point is the actual product. Who would not want to be involved in a cure for cancer or Aids? This is another so-called button. Unfortunately, most consumers WANT to be lied to...they are not cognizant of this but it is part of human nature. Hence the statement "love is blind", which reminds me of the line in the movie A Few Good Men..."you can't handle the truth". Most people reject the truth. It destabilizes their reality. I have worked, as a financial agent, one on one with literally one million people. This is very unfortunate but denial is very prevalent...especially when it comes to romance and finances.
- This is just an opinion, not a statement of fact, but I agree with all the above. I think Stansberry is right on the impending collapse of the dollar, but when you subscribe to his newsletter, you get a lot more invitations to subscribe to additional investment advice for more money than actual easy to find advice. I actually fell for an additional Penny Stock newsletter, so I'm out about $90. I think Stansberry has some good stuff embedded deep within his publications, but I'm an electrical contractor and make $110/hr and better, so every minute I spend listening to long winded videos I can't pause, sifting through more up sell pitches costs me about two bucks. There must be something better out there. Oh, by the way, I have found out how to make millions on the internet. Just come up with a plan to make millions on the internet, and then give it away free, only charging $9.95 S&H. Yeah, I've fallen for that too. I'm not the brightest light in the harbor, but I'm getting brighter.
Yes, I can just imagine what you're thinking right about now. Probably something like - So Einstein, just exactly what do call what you're trying to do here, it doesn't seem to be that much different than that slick infomercial to me.
Take it or leave it, it's just a ride and that's the truth. Can you handle it?
Frankly, there is some level of truth to that however, here's the critical difference. Firstly, I'm not part of a well financed corporation with unlimited marketing budgets capable of dazzling the masses into surrendering to my surgically sewn gallons of never-ending snake oil elixir. Secondly, what I am selling is a truth and fact-based common sense proven-approach in deploying trading and investment capital in the financial markets - period. Thirdly, I often work 16-hours a day, six and sometimes seven days a week to stay on top of and share my school of hard knocks experience and success with those who wish to profit from it. Finally, I'm just trying to do my best to provide whoever seeks it, a means by which to weed through the arcane business of trading and investing, and simplify this otherwise complex endeavor with clear, truthful, and transparent guidance. With that settled, let's get back to finishing up where we left off prior to this off-the-cuff quasi commercial interruption, shall we.
Learn to Profit in Both Up-trending and Down-trending Markets
Cursed with my own set of visions, it became clear to me a long time ago that in order to enjoy this particular ride, I needed to develop an effective plan to make money in both up and down markets. Once I had developed, built, and tested these strategies, I could finally agree with Bill Hicks and say with confidence, "don't worry, be happy,"- it's just a ride.
How's this Roller Coaster Been Built?
Just take a gander at this chart of the S&P from 1975, and tell me exactly what the f%#k happened from 1995-2000. Five years of moronic insanity, that's what happened!
As if the near-vertical rally from 1982 through 1995 wasn't potent enough, and despite the warning shot across the bow with the crash of '87, somehow the financial masters of our universe thought it prudent to incite a bubble so utterly freaking ridiculous that you simply can't help but laugh at the absurdity of such an anomalous abomination.
What's even more ludicrous is that this five-year golden period of insanity is the "back to normal" every other moron believes we ought to strive returning toward. Please, get over it people. Although that was a rather exhilarating episode of mass disillusionment, we simply cannot pine over it as some romantic measuring rod toward which we should obsess to get "back on track" with. It just ain't gonna happen.
Invisible Roller Coasters
What's most facinating about financial markets is that not only do they resemble roller coaster rides, but if you can conceptually imagine it for a moment, they are far more like "invisible roller coasters" whose structure of twists and turns take on a visibly tangible shape only after we have traversed them.
How's that for the thrill of the unknown. You strap yourself into the seat of one of the biggest most powerful rides within our realm of reality, and you have no idea where it will take you nor how, and no clue as to whether or not you will get to your final destination in one piece.
Having said that and believing it, and despite any of my personal views or instincts, I simply do not know with any level of reliable certainty which way, how far, how fast, or how stable the balance of our ensuing ride will be. It is an invisable and dynamic work in progress that we all must somehow be adequately prepared for.
Sounds impossible to navigate doesn't it? Well, it's not. It's really quite simple and it goes something like this.
Since we do not know the forward path and structure that markets will take, we must look to the paths and structures they have already formed. Narrowing down what makes price tick as it were, enables us to acquire the most reliable clues as to the paths and direction that will most likely unfold before our eyes over the near and long-term future. Anything beyond the mathematical calculations that quantify a historical edge, which can be measured within this realm, is nothing but sheer folly - fundamentals included Cra-merica. Touché Jimmy, so too is there always a bear market somewhere.
Speaking of Cra-mer', it is not my intention to single him out or anything, but a respected and controversial rough-around-the-edges acquaintance of mine just completed a short exposé on the maniac of Mad Money. Much of it is outrageously funny, some of it is rather illuminating, but mostly it's just downright spot-on and entertaining. If you can stand a bit of bad language and grammar, you can watch it here on YouTube.
Back to the main topic, think of a sound plan of engagement as a mathematically quantified excersise in continually observing boundaries and markers that sound off various alarm-levels or all-clear signals from which to position yourself in the best light of participatory bias so as to enjoy the thrill-ride, and not get killed in the process.
Even with the best laid plans, seat belts and crash helmets are mandatory requirements for boarding this thrilling and at times dangerously unforgiving coaster ride. By that I'm alluding to having reverence for one's acquired capital, and gaining a solid command of money management to the extent that will empower you to mitigate risk and as Cramer likes to say, keep you "in the game".
Unfortunatley, the old "don't risk anything you can't afford to lose" adage no longer applies. You see, the masters of our financial universe are intentionally forcing us to take risks we perhaps might not otherwise take if there were any reasonable alternatives.
They're telling us you gotta be on the ride or you'll be left behind, and yes, we're listening because it's proven to have been the truth. What they're not telling us is how to effectively prepare for the journey, and just what to expect along the way. Why, because the majority of those ruling the universe haven't a clue.
We suspect its easier and more profitable for them to just serve us up as billion-dollar marketing lists of ignoramuses, and steer us into to the corrupt hands of financial institutions so that their partners in crime can generate fees-galore with no promise or guarantee of fiduciary duty, balanced guidance, or accountability for performance.
Timing Is Everything
When investing or trading in any financial instrument, one adage that shall forever endure is that timing is indeed everything. Interestingly, no matter how profitable or effective, the exact same truth applies to adopting a strategy, discipline, or planned methodology of engaging the markets.
Similar to the probable serendipity associated with the moment in time at which you invested in your first stock or mutual, so too is your fate tied to the moment in time at which you commit to embrace a proven strategy of engagement.
For instance, if you were real lucky, you would have decided to give my NAVIGATORS short-term E-mini trading strategy a try last week. Had you decided to do so four months ago, you'd be like Cramer, who is still trying to clown and snowball his way back to breakeven.
Or maybe you might have instead decided to commit to trading Dollar Futures a couple of weeks ago. If you did, my NAVIGATOR would appear to be a panacea of profits - or a traders' paradise if you will. Had you decided to embark upon that journey at the start of August however, you'd have no doubt spilled some blood by month's end.
Integrity, Knowledge, Tenacity, and Patience Are Everything
There are no Holy Grails folks. Despite the fact that a given strategy may have produced incredible absolute returns over numerous market cycles, even the most profitable top-tier investment/trading methodologies undergo periods of drawdown. So in that sense, Cramer has it right when he says you gotta lose money to make money.
Just like a stock or mutual fund, the timing of one's psychological investment toward committing to a strategic market discipline also carries risk. With that said, I thought it prudent in closing to come up with a new adage, which I've placed at the head of this paragraph.
So, roll up your sleeves, do-the-math, do the homework, draw your own conclusions, mentally prepare to risk spilling plenty of blood throughout the course of an ongoing battle ride, and then get to work or you might just miss the ride of a lifetime.
Until next time,
Even if you miss a major bottom in a stock or market, spotting flag formations can help you buy in and still enjoy most of the uptrend.
One of my favorite chart patterns is the flag formation. These flags or triangles are most often a continuation pattern, which is an interruption in the dominant trend.
Often, one might miss a stock or ETF that is completing a major bottom or major top. If you understand and are able to identify continuation patterns, you will often be able to find a better risk/reward entry point and catch more of the major trend.
When the flag is formed as an interruption in a major uptrend, it is often referred to as a “bull flag.” The formation of a flag formation during a downtrend is therefore known as a “bear flag.” Let’s look at some past and current examples.
Chart Analysis: In either a bull or bear market, whether you are talking about a stock, ETF, or commodity, it is common to see a series of flag formations.
In the 2007-2009 bear market, there were quite a few “bear flags” evident on the daily chart of the Spyder Trust (SPY) between June and September 2008.
The bear market rally from the March 2008 lows terminated in May, as noted in a recent Week Ahead column.
- SPY had dropped from a high of $144.30 to a July low of $120.20 before it started a rebound
- After two to three weeks of upward action, an uptrend (line b) could be drawn
- After the high on August 11, the flag formation (lines a and b) took shape
- Five days later, SPY closed on support (line b) and then closed below it the following day. This completed the flag formation
- The SPY gave investors many attempts to establish a short position as it rebounded for the next eight days, closing one day above the former uptrend (line b)
- The rebound high at $130.71 was well below the August 11 high of $131.51
- The selling picked up after the Labor Day holiday, as SPY dropped 11.5% in the next thirteen days
During the incredible rally in gold futures and in the SPDR Gold Trust (GLD), there have been a number of flag formations. Some have lasted many months; others, only a few weeks. This daily chart covers the action in GLD from August through December 2007.
- GLD has just rallied from a low of $63.47 in August to a high of $83.64 in November, a 31.7% gain
- In just seven days, GLD dropped to a low of $76.11 (a 9% decline). This decline signaled that a correction was underway
- Most traders, after missing a sharp rally, are too eager to get back in and buy on the first bounce
- GLD managed to move back above the $82 level before the rally fizzled. This established the downtrend, line a
- On the next decline, GLD held above prior lows, which was a positive sign, and a level of support was established, line b
- The flag formation (line a and b) was not complete until prices reached the apex of the flag-but the rally was still quite dramatic. GLD gained another 20% in the next four months
One of the most historic bear markets developed after the December 1989 high of 38,957 for the Nikkei-225 Index. As I mentioned earlier, flag formations come in all sizes, and after declining for just ten days the Nikkei started to rebound.
- The rebound lasted about three weeks (see red box), and formed a very-short-term flag formation. On an hourly chart, this would be much more evident.
- The Nikkei dropped 10,000 points in the next 33 days, and finally stabilized in April with a low of 27,251.
- The Nikkei began a very sharp rebound, which after a few weeks allowed one to draw the uptrend, line d, which stayed intact until early June.
- Often times you will discover that one flag formation becomes part of a larger flag formation.
- From the May-June highs, you were able to identify a good level of resistance, line c. Thus you had a flag formation, lines c and d.
- The drop through support at line d completed the flag formation. After the initial decline, the Nikkei began to rebound again, and a new level of support (line e) was evident.
- This was part of a larger flag formation, lines c and e. The rally into July peaked at 33,177, which was just below the May high of 33,244
- The completion of the flag had even more negative implications, and the Nikkei lost 12,000 points by September.
How to Profit: By looking for the formation of flags in either up or down trending markets, I think you will be better able to identify good risk/reward entry points.
In this week’s Trading Lesson, to be released Thursday afternoon, I’ll continue this discussion of flag formations. I’ll also show you how Fibonacci analysis can help you identify entries, exits, and protective stops when trading flag formations.
In the way of a refresher course, the efficient markets hypothesis (EMH) proposes that global financial markets are efficient in terms of the information available to investors and traders that drives prices. Another way of looking at the efficient markets hypothesis, which has influenced much of the investment thinking around the world in recent decades, is that based on the information available, you cannot achieve risk-adjusted returns in excess of the average market returns over time. The efficient markets hypothesis is the sister hypothesis of the random walk hypothesis, which essentially states that the direction of prices in markets cannot be predicted.
Many have taken issue with both the efficient market hypothesis and the random walk hypothesis. Of course, the most notable is Warren Buffet, who said. “I’d be a bum on the street with a tin cup if markets were always efficient.” Clearly, Buffet’s performance has demonstrated that markets are not efficient, as he has consistently beaten the averages. His $5 billion dollar bet on Bank of America may help him revert closer to the average, but here we digress.
What Buffet is suggesting is that there are methods of analysis that allow an investor to beat the market, and have allowed him to do so handily. Buffet applies methods of value investing analysis, and good gut instincts on management, to beat the averages. It was Warren Buffet’s mentor, the world-renowned value investor Benjamin Graham, author of The Intelligent Investor, who advocated investors develop what he called “formula timing plans”, to determine optimal times to enter and exit value-based investment selections. The following is what Benjamin Graham had to say about formula timing plans:
“I am more and more impressed with the possibilities of history’s repeating itself on many different counts. You don’t get very far on Wall Street with the simple, convenient conclusion that a given level of prices is not too high… In recent years certain compromise methods have been devised by which the investor can take some advantage of the stock market’s cycles without running the risk of an unduly long wait or of “missing the market” altogether. These are known as Formula Timing Plans.”
Benjamin Graham is clearly suggesting that market cycles be used to identify opportunities to buy and sell, and the mounting evidence in the field of market cycle dynamics suggests he is correct. He was clearly referring to applying various methods of technical and fundamental analysis that allows the identification of what Ecclesiastes refers to as, “A time to buy and a time to sell.” Benjamin Graham proposes a formula timing plan in addition to applying principles of value investing. This idea runs highly contrary to the concepts behind the efficient markets hypothesis.
Value investors have clearly been punished along with all other investors in recent years for not recognizing the market cycle dynamics at work. The question for all investors, and certainly traders, is whether there are methods of technical analysis that allow you to identify entry and exit opportunities in price and time consistently enough to allow you to beat the averages. Technical analysis essentially proposes that there are in fact methods that can be added to various investment approaches to create a formula timing plan to beat the averages.
PQ Wall was fond of saying, “Pattern is the sunlight of the mind.” Technical analysis basically proposes that there are patterns at work in markets that allow an investor or trader to anticipate and identify market turns in advance. Technical analysis recognizes that there are technical patterns that can override the fundamentals of a market or specific security.
There are an almost unlimited number of methods of technical analysis applied by both investors and traders seeking to improve their odds of beating the market averages. There is tick, trend, Fibonacci ratios, Elliott waves, Gann fans, advances/declines, accumulation, moving averages, moving average convergence/divergence (MACD), and the list could go on. Many technical analysis practitioners have proven to apply technical methods to beat the averages with different formula timing plans.
Investors and traders should identify and develop a formula timing plan that suits their investing style and philosophy. It should be a plan that has proven over time to identify opportunities to buy and sell on a consistent basis. After studying the technical market masters for decades, I have developed Market Cycle Dynamics (MCD) formula timing plan as a relatively straightforward method with the goal of identifying when to buy and when to sell. It can be applied by both long-term investors and short-term traders.
MCD uses 1) price, 2) time and 3) sentiment to anticipate turns in any global market or security. For price, MCD uses new Fibonacci methods and drill-down price grids to identify high probability multi-year or intraday price target turns. This is similar to the Wyckoff method that identifies support and resistance lines, only MCD uses Fibonacci grids and price targets. Specific Fibonacci grid targets provide specific and clear entry, exit and stop loss prices. However, time can be just as important as price. MCD uses a new method of time cycle analysis based on ideal time cycle lengths and their Fibonacci ratios, which have been studied and documented for years. For market sentiment, MCD uses stochastics, which can identify when a market or security is making a high probability high or low.
When a market index or a security is approaching an important Fibonacci price target in a “hot” Fibonacci price grid that has identified turns in the past, you should always pay attention. If this is occurring in a time cycle window where you are looking for a top or a bottom you need to pay closer attention. If price and time has your attention and stochastics are indicating that the sentiment of investors and traders is overbought or oversold, you have an opportunity to take action and beat the averages. Can you do it on every investment or trade? No, but a solid formula timing plan will help you preserve your capital, increase your risk adjusted returns, and you can do it often enough to beat the averages.
Global markets are in the final business cycle of the Kondratieff long wave. The chart below is an example of price, time and sentiment in the rally since the March 2009 lows. You can clearly see where price, time and sentiment converge to trigger a high or low in the market at an important turn. These targets are where the MCD formula timing plan provides you with an opportunity to buy or sell. The chart demonstrates the unfolding cycles tracked by the MCD formula timing plan. Note the high and low levels in the stochastics as the S&P 500 approaches Level 1 Fibonacci grid targets. Mr. Market is currently trying to put together a rally in the latest Wall cycle, but this is Wall cycle #6, and is expected to be a third last and weakest cycle that tops early and dies hard. It will be a short cycle unless QE3 comes to the rescue.
Applying the MCD price, time and sentiment approach to an individual security is demonstrated in the chart below of Proctor & Gamble (PG), a large cap global franchise company with a higher dividend than most companies. The chart demonstrates an ideal Wall cycle in time, the Fibonacci Level 1 and Level 2 price grid, and investor and trader sentiment in the daily 55 period stochastics. The low in August created a buying opportunity, but the rally from that low met resistance at the Level 1 76.4% target price of $63.62 with stochastics approaching overbought status again. In light of the larger cycles putting downward pressure on global markets, long-term holds are generally not advised at this time.
Just looking at the business cycle and the smaller cycles is not enough. There are now forces in play in the current global economic crises that are much larger than the business cycle, name the long wave winter season. They are putting great downward pressure on the business cycle and global markets. Great caution is advised for investors and traders.
While we are on the subject of the efficient markets hypothesis and the random walk, the chart below of Australia’s ASX is of interest. The chart is a 1-minute intraday chart of the Level 3 and Level 4 grids. These grids are generated using the 1991 Level 1 low of 1202.54 and the 2007 high of 6873.20 and drilling down to the Level 3 and 4 grids. That price action and the 21 period 1-minute stochastics don’t look very random to me. It looks like a combination of natural Fibonacci forces and computer programs. This is an intraday version of what happens in the larger cycles.
If market price movements are efficient and random, and their direction cannot be predicted, why is the ASX finding support and resistance turning intraday on the Level 3 Fibonacci grid prices with precision? The answer is twofold. First, Fibonacci ratios are a natural occurrence in markets, and second, the quantitative analysts “quants” that write the computer programs use the Level 1 highs and lows and Fibonacci ratios in their algorithms. MCD provides quant-busting power to investors and traders by drilling into the Fibonacci price grids.
Finally, the DAX is of particular interest for the MCD approach. It is remarkably oversold due to the European sovereign debt crisis. Most markets held earlier August lows, while the DAX has dropped through the Level 1 golden at 5542, which was critical support and is now critical resistance. If the DAX falls through the Level 2 76.4% target at 5161 and then the 61.8% golden ratio target at 4926, the European debt crisis may envelop the world sooner rather than later. Alternatively, price, time and sentiment suggests the DAX is spring loaded for the Wall #6 rally. Either way, investors and traders have specific prices for entry, exit and stop losses to take action. If the DAX rallies here, Wall cycle #6 is expected to die young, hard and fast.
Investors tracking large cycle turns and traders tracking small cycle turns to buy or sell can apply the MCD approach of price, time and sentiment to any global market or security. Tracking the market cycles in price, time and sentiment as an investor or trader can increase your odds of beating the averages, debunking and helping send the efficient markets hypothesis to the dustbin of history.
by JW Jones
Social mood is absolutely horrible right now. In my experience as a trader I do not recall a similar time frame in my life. Social mood has deteriorated to the point that it would not surprise me to see two grown men come to blows over a fantasy football draft. Oh wait, that happens every year!
In all seriousness, the world seems to be getting more dangerous every day. At this point I think even Mother Earth is socially frustrated as she wreaks havoc all over the world. Earthquakes, droughts, wild fires, famine, hurricanes and the list goes on and on. Politics are as divisive as any time in recent history and the rhetoric is just excruciating. So what does all of this negativity mean for financial markets?
It means that every article is under the microscope and anyone who opposes the view of the writer or speaker reacts with vitriolic commentary that many could conceivable call “hate mail.” People are hurting badly from both an economic and social perspective. You can bet that the current social malaise is going to impact financial markets and I would argue that it already has.
August was a poor month for most investors as the equity indices took a nosedive and sold off sharply. I warned members of my service incessantly to reduce risk ahead of the selloff and I sat in cash as markets were crushed. I received countless emails telling me I was essentially an idiot and Mr. Market was going to kick my backside. Initially they were right, but time proved my analysis prescient.
August was the single best month I have had for members at my service at OptionsTradingSignals.com. I only placed 3 trades in the entire month. Two SPY trades that were directionally biased to the long side and both produced outstanding profits. I also utilized a time decay strategy for a GLD position which worked out quite well. By the end of the month of August all 3 positions were closed and the gross gain based on maximum risk was over 100%. If a trader risked a maximum of $1,000 on each trade taken at the end of August the trader’s account would have grown to around $2,000.
One of the guys I trade with got his ETF newsletter subscribers in at the bottom for a quick 4.5% bounce then shorted a week later using the SDS inverse etf to catching another 6% on the way down… So as you can see there are many ways to play market volatility
So what is going to happen next? The funny thing is not a lot has changed since my most recent article I posted back on August 28th. The following chart below still holds sway in terms of overhead resistance for the S&P 500:
In the same article I wrote the following statement:
“In the short to intermediate term, I believe we will see higher prices and a test of the key S&P 1,220 area or possibly a re-test of the key S&P 1,250 price level which corresponds with the March 2011 pivot lows. Additional resistance would come in around the 1,260 – 1.270 area which marks the neckline of the recent head and shoulders pattern which triggered the selloff in the S&P 500.”
Unlike many financial writers, I am a trader first and a writer second. I put my money where my mouth was and took a trade that got long based on the analysis I provided readers and members of my service. The following price chart illustrates the resistance level that held the S&P 500′s first attempt to rally:
Those of you who do not believe that technical analysis works are wrong. While technical analysis should not be the only metric used to enter or exit positions, basic support and resistance levels can help traders take profits at appropriate times. In addition, laying out longer term support and resistance levels give traders the ability to place trades in a step or tiered system. Essentially, once a trader has identified support and resistance levels the trade can sell into resistance and add to his/her position near support. Technical analysis provides great exit and entry points for astute traders.
My viewpoint of the S&P 500 has not changed much since August 28th. I think we will continue to see choppy price action and a retest of the 1,220 level is likely, if not probable. If the SPX 1,220 price level gives way to higher prices a retest of the March pivot lows will be the next resistance point. The March pivot lows correspond directly with the SPX 1,250 price level and the 50 period moving average will be flirting nearby.
If prices continue to work higher the neckline of the head and shoulders pattern which produced the selloff in early August will be tested. The point that readers should take from this is that overhead resistance is extreme at this point. The following chart below illustrates the key resistance levels and the current rising channel on the daily chart.
While it may sound a bit confusing, higher prices in the near term will likely be bearish in the intermediate to longer term. In my previous article, I commented that I believed we had likely entered the next phase of the bear market and I still believe that. At this point in time I am just waiting for the price action to confirm my suspicions.
The first confirmation that the bear market will have returned would be a lower high on the daily and weekly time frame. The final confirmation would occur if prices rollover and breakdown below the August lows. If the August lows are taken out on a daily and/or weekly close an all-out rush to the exits is possible. Ultimately I believe that risk is increasing to the downside if prices keep working higher.
Right now I’m expecting higher prices unless the ascending trendline of the channel is penetrated on a daily or weekly close. Otherwise, the bullish churn higher will continue. The chart below illustrates the key support levels that if broken could lead to additional downside.
I am expecting to see a test of the 1,250 area before the end of September. It is entirely possible to see a test of the neckline as well which would help suck in retail investors who are scared they are going to miss the move back up. A rally that is contained around the SPX 1,250 – 1,275 price levels could result in a sharp selloff.
All eyes are on the key 1,220 price level to the upside and the August lows. A breakout in either direction could result in a big move. If I had to guess, the thrust higher will end in late September or the early part of October, but I would be remiss not to mention that one headline out of Europe could derail my entire thesis.
The two single largest threats to a stock market advance stem from Europe. The European sovereign debt crisis is one key issue that could alter the marketplace by its own merit. A more silent concern for U.S. equity markets is the impact the European situation will have on the U.S. Dollar.
by Macro Story
Bull versus bear. Greed versus fear. Smart money versus dumb money. Depression versus transitory soft patch. Credit versus equity.
In one corner is the credit market, a rather mighty opponent where $1 million defines an odd lot. Credit has spoken loudly. They have priced in a severe recession, depression whatever you want to call it.
In the other corner stands the equity market and although fierce is smaller than its opponent where 100 shares defines an odd lot (a mere $700 in the case of BAC). Also known as the contrarian equity has priced in a transitory soft patch, the opposite of credit.
Equity hopes to bounce back from a recent loss where they completely failed to price in the 2008 Great Recession. It was a horrible loss for equity as throughout the year they continued to try and price in economic growth only to be knocked back down by economic reality as GDP contracted larger with each passing quarter. Credit on the other hand has put together an amazing string of victories. They have priced in previous economic recession with the utmost precision.
We are now on the eve of yet another showdown. Both corners are far apart and yet only one can be proven correct. The other must accept defeat. The stakes are large and the reward to those on the right side even larger. History will be the judge and time is all it asks.
Aaa Corporate Bond Debt VS SPX – Yields are currently at multi year lows and moving lower each day. Meanwhile equity has begun turning higher. Equity markets would say Aaa rated debt should be yielding 6.5% whereas debt says the SPX fair value is 600.
Baa Corporate Bond Debt – Similar to Aaa debt where rates are not only at decade lows but moving lower. Equity markets would say Baa rated debt should be yielding 8% whereas debt says SPX fair value is 600.
5 Year Interest Rate Swap Spreads – Similar to corporate debt not only is there a divergence but it is growing again.Corporate Bond Spreads (Aaa / Baa) – Spreads already at multi year lows have begun to turn higher as have equities contrary to their inverse relation. Considering the little room spreads have to move lower it would appear equities have it wrong here and going not only in the wrong direction but also a rather large gap to fill.
Foreign Reverse Repos
This is a chart that has been making the rounds of late. It shows the amount of reverse repurchase agreements among foreign official and international accounts. Notice the trend during this current exponential move higher in deposits versus that of September 2008. Additionally notice the eerily similar price action in equities during both times.
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