Dec 30

My 60-min Trend System issued a sell signal. See here and here. (These updates are sent out as part of my Trend System Notifications).

This was not a clean-cut call, and at best it could be called an 'early' sell signal. We had none of the markers that I look for at sub-cycle tops, especially given the setup that I discussed here. So honestly I still think this wave could continue up in early January.

But what happened today:
1) 15-minute sell signal (again, like the one on Wednesday)
2) 60-minute main indicator rolled over. It is unconfirmed by other indicators on my system, but I am going to listen to it right now.
3) Last trading day of the year and the long weekend before the next trading day.

So I am just choosing to heed my system 'warnings' (not official sells) and walk away until next week. I am fully prepared to buy again if my main indicator turns back around. And if Tuesday ends up being a large gap up, then so be it. I would have liked this week to end on strength in order to hold over the long weekend, but that doesn't look like its going to happen. So it is wait and see mode for me.

Happy New Year Everyone!

Dec 28

Not a fun day to be long in the market (which I was and still am).

My 60-min system did not officially give a sell signal. The top occurred with no divergence. The setup that I mentioned on Friday is still valid. So I am staying long (perhaps foolishly, we will see). A few reasons for staying long despite the mini-bloodbath today:

1) Top occurred with no divergence on my 60-min system. There was divergence at the top on my 15-minute system. There was also divergence with the low today. We will see how that manifests tomorrow morning.

2) This was a very interesting statistic from 'Trading the Odds': http://www.tradingtheodds.com/2011/12/high-number-of-52-week-highs-in-december/. We also needed a correction for the rally (likely brought on by end of the year tax selling into this rally), but I am still looking for more upside based on my own system and statistics as well.

3) In a very un-quantifiable / un-analytic fashion today didn't feel like the start of a major correction, more like a reaction. Now, the market could spit in my fact tomorrow and say 'I tried to warn you'. And if that happens then so be it. But my gut says to stay long, so I am going to see where this goes.

Dec 27

There continues to be a lot of comparison between now and early/mid 2008, and I continue to say that the comparison is not appropriate. There are some similarities, but there are quite a large number of differences. One of those differences are sector behaviors.

In 2008 nearly everything (with the exception of Staples and Utilities) was showing weakness all together. But right now the market is much more mixed compositionally. Both Technology and Consumer Discretionary are still holding up fairly well, pretty much two of the last sectors that should if we are entering into a crash phase.



My $0.02 at any rate.

Dec 23 - Happy Holidays!

First: Happy Holidays! I hope everybody reading this has a wonderful Holiday season.

Second: Some analysis.

I continue to see this move as bullish for several reasons.

1) The daily chart setup continues to be valid

I am referring to this study: Dec 8 - Daily Cycles, Looking for an Edge. This setup continues to be valid and the last 3 days has made the setup appear to be more likely on my daily indicators

2) 60-min statistics are very compelling

As I said on Tuesday a 60-min buy was issued. Today I got a confirming signal from one of my secondary indicators. And this has happened in a very specific way. I ran a study on my cycle system and since 2001 there have been 67 similar setups and 93% of them led to higher highs (typically several percent higher). Again, these are stats not predictions, but it is a very compelling stat.

3) Very bullish seasonality for not only the week before Christmas but especially the week after

See: http://www.bespokeinvest.com/thinkbig/2011/12/23/market-performance-during-the-last-week-of-the-year.html

4) Closed above the 200 day MA

This is a nice confirmation for point 1 above and a bullish way to end the day before the Christmas stock market break.

5) Closed above the downtrend line

The downtrend line that the market has been unable to breach for the last 5 months was finally surmounted today. And that's not bearish.



Third: Some eggnog ... with a very healthy shot of whisky. Time to start drinking :) Happy Holidays!

Dec 21

Just another one of binv's crazy ideas. Don't pay it any attention.

Dec 20

I haven't said much the last few days because:

1) When there is no reason to say anything, then don't say anything
2) I have been very busy, which reinforces point 1

My 60-min Trend System issued a buy signal. See here and here. (These updates are sent out as part of my Trend System Notifications).

Bottom yesterday was on highly negative divergence. But divergences have to be confirmed before they are tradeable. The move up today confirmed the divergence and a buy signal was issued.

Dec 14

Today did not look good at all for any kind of bullish case. Today needed to be a dramatic reversal day, and instead it was just a big red candle. Divergence from yesterday is gone and everything looks like it is rolling over on my 60-min chart. Unless tomorrow brings some kind of bullish miracle, the tone for the end of the year is looking not-so-Santa-Rally-ish.

Dec 13

Move down today is happening on some very serious negative divergence on my 60-min chart. I am going to wait for an upturn / buy-signal to confirm. But it wouldn't surprise me at all if tomorrow confirms this correction is over.

Dec 9

Current count:

Dec 8 - Daily Cycles, Looking for an Edge

Okay, enough things have happened that I can now start thinking about this scenario more concretely.

1. The overbought condition on the 60-min Trend System has been relieved. And the fact that it is done so in a relatively sideways manner is pretty bullish
2. A couple of days ago a Daily Cycle Long Signal occurred on my Daily Trend System.

I talked about a potential setup last month here (Daily Cycles - Looking for an Edge), that did not end up materializing. The triangle did not break up, it broke down pretty hard and the Daily signal cross never happened. But the rally this past 2 weeks reversed that trend and we now have a positive signal. I will rehash much of what I said last month (because the stats are still valid) and what I will be looking for in the current environment.

There has been a big (and good/useful) discussion of cycles in my blog comments recently. What I want to do in this post is to take a step back and offer a statistical look at the cycle signals from my Daily Trend System

Note: I am referring to my Daily System, not my 60-minute System. I have backtested my Daily System to 1982. And like with my 60-minute system, I trade the signals based on the sub-cycles. The last Daily System trading signal was a Cover Short/Establish Long signal at 1181 on 10/10/11 on the SPX (see here and see here)

There are multiple sub-cycles within a cycle in my system. And while I don't show the cycle signals (because I don't trade off of them, I use them to 'reset the boundaries' of my system, and they are used as confirming indicators), they do have some analytical usefulness and might give some insight here.

The reason being that we did get a Long Daily Cycle Signal earlier this week and now have a short term pullback to relieve overbought conditions, which I tend to view as a buying opportunity.

My cycles are not defined on some strict time relationship, in fact there is no time requirement at all. It is based completely on indicator moves (mostly MA based). Since 1982 there have been 24 cycles (with a long/up half and a down/short half). Minimum Duration: 154 days, Maximum Duration: 951 days, Median Duration: 390 days, Average Duration: 444 days.

So let me pose this hypothetical: We close above the 200 day MA sometime in the next week.

Like I said above, we got a long cycle signal earlier this week. I measure a cycle from long cycle signal to the next long cycle signal. This made the last cycle 440 days, which is right around the average and median cycle durations. That is good and makes sense.

So what would be the odds that a close above the 200 day MA would be a 'fakeout' (i.e. that it close slightly above the 200 day MA in mid/late Dec and then crash, in a Wave 3 down or something similar)?

Even though I don't trade the cycle signals, I ran a study that was formulated like this: From the price the long cycle signal was issued, what is the highest sub-cycle signal price before the next cycle short signal was issued? This gives a way to quantify how many cycles did not 'fail'. The stats are pretty compelling:

Study Results
---------------
24 Long cycle signals
21 cycles made higher high sub-cycle signals before next cycle sell (88%)
Max Gain: 68.0% (Max sub-cycle peak, not necessarily the next sub-cycle peak)
Avg Gain: 19.7% (Avg sub-cycle peak, not necessarily the next sub-cycle peak)
Avg Loss: -2.2% (Max value of failure)
Max Loss: -2.8% (Max value of failure)

Here is what I see, and here is the edge that I think the stats are giving me:

If we close above the 200 day MA (in essence making a higher high), there is an 88% chance that we made a legitimate bottom in October, that the last higher low confirmed that bottom, and that we should be looking for more upside (and on average a large amount of upside, 20% gains).

Again, these are statistics, not prognostications.

But given the way this bottom has developed on my Daily System, and the bullish seasonality, the fact that we made a higher low above the October low which confirmed the divergence seen at the October bottom, the fact that the overbought conditions have been relieved on my 60-min trend system, etc. etc. I think if there is any edge to be gained from this analysis, it is to go long after this current pullback ends [aggressive] or to go long after a higher high / close above the 200 day MA [conservative] and not to expect a fakeout and crash (end of Minor 2 and looking for a Minor 3 down, or something equivalent).

Dec 5

My 60-min Trend System went short today (as did I). Yet despite that, I think December will end up being a very bullish month.

BUT! The SPX failed at the 200 day MA ... again!

Yeah, so?

It made a clear higher low since the last test confirming the divergence seen in October. I think the current pullback is just a move to relieve the short term overbought conditions (at a level that will invite over-bearish prognostications, i.e. the 200 DMA). I actually see some very bullish developments happening with my Daily Trend System. But there needs to be some more confirmation first, more on those as they develop.

This is what I would expect to see if the more bullish scenario is going to play out.


In the meantime, just trading the signals from my 60-min system.

Nov 30 ... and a *CRAZY* idea

Yesterday was an odd day. Monday had a pullback which was shallow. Then yesterday ramped up in the morning and consolidated / tested the breakout the rest of the day. My trend system had been on a buy since Monday morning (since the gap) and I was just waiting for an entry. It seemed to me like me market was consolidating for a move higher, so I bought: See here and here

And like I was showing Monday, we had a nice proportionate move on many levels. But I would like to go back to a chart that I was sharing with HighRev on Nov 18 (see this chart for the original). The more this wave has unfolded, the more compelling I find the parallel. Here is the updated chart:


I think whatever the next leg ends up being, I think we have more upside to the end of the year.

.... Now, on to my crazy idea .....

First, don't read too much (if anything) into this. It is just an idea that I have been kicking around in my head for awhile. It is not a preferred count. I don't even think it is a likely count, not yet at least. But it has been marinating for awhile and I am just putting it up publicly to see what I think about it on the screen (to make it slightly more 'official' as it were).

The reason why I am thinking about it to begin with is because the last year and a half has begun to take on a pronounced sideways feel to it. And despite all of the analogies floating around, I don't think the comparison to 2008 is appropriate. Way too many people are expecting it. It just has a false ring to it. And I don't think the macro is as *acutely* dire as it was then (which so many downside economic surprises). Yes the EMU is a mess (and flawed), yes I think there are major dislocations to come. But it is a question of timing. Can things be held together for awhile longer? I think the answer, surprisingly, is yes. And I think that is very different than most of the commentary out there, which makes it somewhat contrarian. I don't know, we'll see.

But back to the crazy idea. I wanted to see what a pattern might look like to explain a large sideways move (not topping), that would fake a bunch of market participants out. I mean the thing barely looks like a triangle. But then neither did the one on the BKX in mid 2009.

Food for thought. Feel free to comment or throw poo at this count. I don't much care either way. I am simply thinking about it right now.

Nov 28

My system went into extreme divergence on Friday (while I wasn't here). The move up today is not surprising in direction. However, even though my system issued a buy signal at the open, I am not in the habit of buying the market on a 3% gap up after a holiday weekend. I will wait to see what the pullback says, but I will likely be going long tomorrow.

Overall move was a 62% retrace of the October run. And there are good A to C relationships on the SPX and COMPQ. [Please see the post Randomly Useful: Fibonacci Ratio Table (Updated) for a proper list of Fib ratios].

Nov 23 - Thanksgiving

My 60-min Trend System issued a sell signal. See here and here. (These updates are sent out as part of my Trend System Notifications).

Ouch. That one was almost a 2% loss and was basically a 'worst-case scenario' as far a long entry goes with my trend system. We had a divergence bottom and enough upward momentum to turn my main indicator to a buy (which ended up being the top of that up move). This happens in the afternoon, the market goes sideways for the rest of the day, but not enough to issue a sell. Then gap down the next morning. Tough stuff. But despite a dismal trade ...

I want to wish everybody a Happy Thanksgiving.

I have a huge amount to be thankful for, including all you readers and contributors. This is an extremely tough market to navigate and I am very appreciative of all the high quality insights that make its way onto my comments sections. I wish each and every one of you nothing but good trades the rest of the year.

I am out the rest of today and Friday, so I will see you next week.

Nov 22

My 60-min Trend System issued a buy signal. See here and here. (These updates are sent out as part of my Trend System Notifications).

I am not terribly happy with the rest of the day since that signal however. Leading up to the low today, we had a small divergence (Monday) which developed into a significant divergence today. And by 1 pm it was enough to turn my main indicator. But then instead of following through to the upside, the SPY retreated back into the range. That is not particularly compelling.

I need to see a reason why I should stay in the position tomorrow morning, or I might just cut my losses before I am unavailable on Friday.

Nov 21 afternoon

Looking back at Thursday's and Friday's posts, I outlined a potential retracement scenario.

It is worth noting that the low today met several targets on the SPX:

- Upper Support established in September
- A = C since the October high
- 50% retrace of the October rally

It also looks very proportionate when compared to the March 2011 pullback.

My main 60-min indicator hasn't bottomed yet, but it is starting to slow. Could this be the start of a tradeable bottom? I don't know yet, I have no dog in the race (I am neutral at the moment, see the post from a couple of hours ago). But if it continues in this bottoming fashion tomorrow (and continues to turn my main indicator), then I will consider it more strongly.

Nov 21

First things first:

My 60-min Trend System issued a cover short signal (** not really, see below). See here and here. (These updates are sent out as part of my Trend System Notifications).

But not really.

I have a short term divergence in place, but it is not an official cover signal. I am actually still expecting a lower low to take place before a tradeable bottom. My main 60-min indicator has most definitely not bottomed yet.

So why the cover signal?

1. Gap down Monday open gives a nice cover opportunity
2. This is Thanksgiving week. It will be light volume and likely lots of out of nowhere reversals.
3. I am leaving mid-day Wednesday. So while we might get a lower low (like my indicator expects) it might happen while I am out.
4. Based on observations 2 and 3, we might have a rally the rest of today/tomorrow. So this is likely the best obvious opportunity I will have in the next 2 days to lock profits.

I am completely happy being neutral the rest of this week.

If we get a very compelling bottom by Wednesday morning, I might consider going long (since we have highly bullish seasonality Wednesday and Friday), but it would have to be very compelling.

So as of right now, I am in wait and see mode, and not looking to jump into anything before next week.

Nov 18

My 60-min Trend System is still on a short signal. I think the move today is consolidation in preparation for another move down, and is not yet a tradeable bottom. That is what my system is telling me, and that is also what my gut is saying.

Here is my larger count in context. I am showing it because I am thinking about comparison below, a similar setup to the March wave down. If that were the case, then we might get a low early next week in preparation for the traditional (seasonally bullish) pre and post Thanksgiving day pop.

Nov 17

The large triangle (which implied a bullish continuation) proved indeed to be a fakeout. Huge props to ZimZeb who was calling this move correctly for the last couple of weeks. Really just some outstanding analysis.

I was relying on several points in my analysis for my triangle call, mostly backtesting/statistical. But stats, like I have said before, are simply odds not prognostications (otherwise there would never be any exceptions). So this wave was a perfect example of why a statistical approach (the way I approached this wave) doesn't always lead you down the right path and a real time EW count of the substructure (the way ZimZeb approached with wave) can give you real insight as to when to call the statistical results into question.

Enough waxing philosophical.

My 60-min Trend System issued a short signal today at 12:30. See here and here. (These updates are sent out as part of my Trend System Notifications).

I think, clearly, the wave has rolled over and is trading down. The question is, how far?

I continue to think (for many other reasons) that the October low marked an important low. I continue to stand by the call that the count down from the top is NOT a viable impulse down.

Here was a count and projection that I showed last week (Nov 9) that I am going back to (before the triangle capture my attention):


And here is how I think it could be playing out. I think the large triangle was the red herring, and the smaller triangle was the legitimate one (for ultimate confusion). And an A=C projection would put the end of this wave in the middle of major lateral support right at the 50% retrace from the October low (around 1180-1190).


However, whether my count is correct or the more bearish counts are correct, either way I think we have more downside from here before the next viable trading bottom.

Nov 16

Still waiting for Godot. .... has he been spotted?

Also notice the retrace chart in the last panel. Since the (potential) triangle began, there has been no fewer than 9 overlapping moves of > 1.5%. Murderous.

Daily Cycles - Looking for an Edge

There has been a big (and good/useful) discussion of cycles in my blog comments recently. What I want to do in this post is to take a step back and offer a statistical look at the cycle signals from my Daily Trend System

Note: I am referring to my Daily System, not my 60-minute System. I have backtested my Daily System to 1982. And like with my 60-minute system, I trade the signals based on the sub-cycles. The last Daily System trading signal was a Cover Short/Establish Long signal at 1181 on 10/10/11 on the SPX (see here and see here)

There are multiple sub-cycles within a cycle in my system. And while I don't show the cycle signals (because I don't trade off of them, I use them to 'reset the boundaries' of my system, and they are used as confirming indicators), they do have some analytical usefulness and might give some insight here.

The reason being that we are likely going to get a long cycle signal sometime this week, assuming we don't have a major breakdown here (1226 should hold for a triangle continuation).

My cycles are not defined on some strict time relationship, in fact there is no time requirement at all. It is based completely on indicator moves (mostly MA based). Since 1982 there have been 24 cycles (with a long/up half and a down/short half). Minimum Duration: 154 days, Maximum Duration: 951 days, Median Duration: 390 days, Average Duration: 444 days.

So let me pose this hypothetical: The triangle is valid and resolves to the upside (continuation pattern). Let me outline some statistics associated with such a move.

I measure a cycle from long cycle signal to the next long cycle signal. This would make the last cycle ~420 days (if it ends this week), which means that it would be right around the average and median cycle durations. That is good and would make sense.

So what would be the odds that it is a move up and a 'fakeout' (i.e. that it would reach its triangle objective sometime in late Nov / early Dec and then crash, in a Wave 3 down or something similar)?

Even though I don't trade the cycle signals, I ran a study that was formulated like this: From the price the long cycle signal was issued, what is the highest sub-cycle signal price before the next cycle short signal was issued? This gives a way to quantify how many cycles did not 'fail'. The stats are pretty compelling:

Study Results
---------------
24 Long cycle signals
21 cycles made higher high sub-cycle signals before next cycle sell (88%)
Max Gain: 68.0% (Max sub-cycle peak, not necessarily the next sub-cycle peak)
Avg Gain: 19.7% (Avg sub-cycle peak, not necessarily the next sub-cycle peak)
Avg Loss: -2.2% (Max value of failure)
Max Loss: -2.8% (Max value of failure)

Here is what I see, and here is the edge that I think the stats are giving me:

If we resolve the triangle to the upside, there is an 88% chance that we made a legitimate bottom in October and that we should be looking for more upside (and on average a large amount of upside, 20% gains).

Again, these are statistics, not prognostications.

But given the way this bottom has developed on my Daily System, and the bullish seasonality, the fact that this looks like a triangle (continuation), the fact that my 60-min system is behaving exactly like it does in a triangle (based on extensive backtesting), etc. etc. then I think if there is any edge to be gained from this analysis, it is to go long on a triangle break up and specifically to not 'expect' a reversal (end of Minor 2 and looking for a Minor 3 down, or something equivalent).

Nov 15

Not much to say. Still meandering ...

Nov 14

Today was more of the same that we have had the last few weeks. Reversal at the top, kind of down but sideways as well. The main indicator on my trend system is just drifting.

The funny thing (I guess that depends on your sense of humor, this could easily be sad) is that despite all this chop, the range here is is crazy big. The SPX was down over a percent today and it just felt like part of a sideways move. This is such a strange market and is conditioning us to simply accept and adapt to very strange behavior.

Personally I am ready for some trend days again. Don't much care if they are up or down. Just something tradeable that you can take a position in.

Moving Average 'Price Stretching' Update

Here is an update to my original 'Price Stretching' study: Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching'. Think of this as a companion piece to my previous post: Yet another reason why I don't think we saw 'the' top (3) and BPSPX Update

There is a lot of background information on this study, so please read the original post first.

Between the original post and this post (Secular Bear Market Projection in Historical Context) you can see how I arrived at my comparisons / prototypes / projections.

The 2000-20xx Bear Market updated Price Stretching chart:

BPSPX Update

Here is an update to my original BPSPX study: The BPSPX and the Secular Bear Count. Think of this as a companion piece to my previous post: Yet another reason why I don't think we saw 'the' top (3)

The main points are:

• Bull markets do not end on strong technicals, they end on weak technicals. We always look for divergences in the weekly/monthly MACD (but should be using PPO instead), weekly/monthly RSI, the Advance/Decline Line, New Highs/New Lows, etc
• Why would we expect the BPSPX (Bullish percentage of SPX stocks) to also end on a peak? The answer is: we shouldn't. And the May 2010 peak registered the highest BPSPX reading ever. This is yet *another* reason why I don't think the May peak was the 'top'
• As pointed out in my previous post, it makes more sense to think of bull markets ending on 'tiredness' / 'going out with a whimper'. Where price makes a higher high but the internals do not. We should not only see divergence on the CPCE and VIX but I contend on the BPSPX as well

Yet another reason why I don't think we saw 'the' top (3)

Third installment in the series of reasons why I don't think this cyclical bull market is done.

-- Yet another reason why I don't think we saw 'the' top, Sept 2011
-- Yet another reason why I don't think this cyclical bull is over, Aug 2011

This observation is not as strong as the other two, since it is based on only a few data points (due to lack of data history). So while it is not a standalone observation, it is supportive of the previous two posts above.

I am talking about the Equity Put/Call Ratio.

Like the VIX, the CPCE is an inverse indicator, which means as the market goes up these tend to move down. So in order to use these like indicators to find divergences, they must be inverted. This is what is shown in the chart below.

Now this chart cannot be taken at full face value. The CPCE has only a few years of history (at least in Stockcharts) and we can see below that as far as 'major' turning points go we can only see the behavior at the 2007 top and 2009 bottom. Hardly statistically significant. But where this is valuable is how it can be used as a confirming indicator to support the VIX.

But this type of analysis also has intuitive usefulness. We see over and over again that fear tends to spike on the really deep plunges in the market, and that while fear is still high on the subsequent move down, it is less in magnitude. The opposite is true on rallies. The strong rallies are borne out of doubt and takes people by surprise. The correction after a very strong rally is when the crowd jumps in and the next run is usually less dynamic.

This emotional content of the herd mentality is captured in both the VIX and CPCE. And looking for when the CPCE and VIX move together and when they diverge reveals interesting behavior.

Also looking at the bullishness peaks throughout the series: When bullishness is at a spike peak, that has not signified the market top. In fact the CPCE registered much more bullish readings in 2004-2006 before the final price peak in 2007. From this perspective, the cyclical bull market did not end until the market 'tired itself out' from bullishness.

A similar analogy can be made for the peak in May of this year, which had a very bullish CPCE spike. We have seen several extreme bullish readings on the rally since 2009. But we have not yet seen a 'tired peak' with confirmed VIX divergence to signal a major top.



Addendum 4:05 pm 11/12/2011

Here is another way to think about the patterns that the CPCE has been showing us thus far. For more on my secular bear market projection, see these posts:

-- First Derivative of the S&P 500, Long Term Study
-- Real Secular Bear Markets
-- Secular Bear Market Projection in Historical Context
-- Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching'

Nov 11

Happy 11-11-11

So we got a reversal up today out of nowhere. Much like the reversal down Tuesday out of nowhere.

And you know what, crazy out of nowhere reversals are the purview of large triangles. That is what I think we have.


The parallels with the 2009 Silly Season are becoming stronger I think.

Nov 10

Chop, chop, chop. Cover short signal was given today for the short signal from yesterday. Chop, chop, chop.

Nov 9

Did the SPX consolidate above the 200 day MA? Nope.
Did the support level that it established yesterday hold? Nope.

Chop, chop, chop. This is was a nasty one since the gap down this morning went against the long signal from yesterday. Sell long signal was given at the open, see here, for a 1.8% loss. Not fun.

My 60-min Trend System then issued a short signal today. My main indicator continued to roll over all day long and issued a short at 1:50. See here and here. (These updates are sent out as part of my Trend System Notifications).

.... chop, chop, chop .....

Looking at the levels again (which didn't work out so well yesterday) it seems like the market is still working on a range. The failure yesterday confirmed the top part of the range, and I think the bottom was established a few weeks ago. I think that this move will likely revisit the bottom of the range.

In fact, this is eerily reminding me of Silly Season 2009 (recall the Dubai world 'default' that November with a similar parallel here on Italian bond fears).

So if that parallel were to follow, then we are establishing a large range for silly season, and basically the market moves will be inscrutable and range bound for the next few weeks. We'll see how that plays out.


EW count for anybody who cares.

Nov 8

My 60-min Trend System issued a buy signal today. See here and here. (These updates are sent out as part of my Trend System Notifications).

Looks like we did get a reversal off support. Follow through tomorrow to consolidate the close above the 200 day MA will be key.

Nov 8 - Levels

The action the last 3 weeks has been very choppy and confusing, and trying to decipher it has not been easy. But with the move up yesterday and the move down today, this might be what is going on:

Trend System Performance

I wanted to show the performance of my 60-min Trend System since the end of the last confirmed major turn in the stock market: the beginning of May 2011

From an EW perspective, I was calling a major wave ending in real time. See:

-- May 2
-- May 5 (and a Long Term View Update)
-- Regarding Tops and Sloppy / Misleading EW Practices

So while I had the expectations of a top, my system doesn't care about expectations, it only trades the trends present in the market. Same deal with the most recent bottom in October, while my expectations are that it is a significant bottom (see Revisiting the Large Count), my system doesn't trade expectations.

Here is the performance on the SPY:


What is interesting to see if you dig into the data is that it gave correct signals for the two biggest waves since May. It held both the July and October trends for 10% gains each, one being a short and one being a long.

And that is the philosophy I used when building the system. Try to find trends and give them the leeway to develop, but to cut them early if the entry setup turns out to be a fakeout. And the average winning trade rate is only 50%, but the average winning trade is much larger than the average losing. (And while this is only a 6 month sample size, the same pattern holds true on a backtest to 2001).

What I like about my system is that it consistently gives me an edge, especially when EW counts are ambiguous. And it helps me sort out what is happening in reality vs. my expectations: Regarding Trading Positions and Long Term / Macro Outlook

Nov 7

Rough day. After several hours today my system finally issued a signal ... and it turned out to be the wrong one. Short signal issued at 1:00 (here) and not even an hour later it was cancelled (here). Tuff sledding. Cut the losers early when they go against you and wait for the next setup, and that's what I'm doing.

Nov 4

From yesterday: Chop, chop, chop. Up 3%, down 3% up 3%, etc. Definitely not an easy market to take positions in when these moves happen over 1-2 days

Today? 214th verse, same as the first.

My 60-min Trend System issued a sell signal today. Buy signal from yesterday got cancelled by the gap and move down this morning, giving the trade a 0.8% loss. Chop, chop, chop. See here and here. (These updates are sent out as part of my Trend System Notifications).

Currently waiting for the next setup to emerge.

Nov 3

Chop, chop, chop. Up 3%, down 3% up 3%, etc. Definitely not an easy market to take positions in when these moves happen over 1-2 days

My 60-min Trend System issued a buy signal today. See here and here. (These updates are sent out as part of my Trend System Notifications).

Nov 2

My 60-min Trend System issued a cover signal with the move up this morning. See here and here. (These updates are sent out as part of my Trend System Notifications). Not a huge gain with the move down (1.6%) but I will certainly take it and be grateful.

And speaking of being grateful, this is another reason why I am extremely grateful for my trend system in the current environment: One Big Fat F***ing ETF, Deal With It. Stock picking isn't dead, but it is really hard to get an edge that way when the market as a whole flips 'risk on' / 'risk off' like a switch. Finding a way to navigate that chop is key.

Like I was saying yesterday, the setup felt a lot like Sept 22. And today felt a bit like Sept 23 (a real ramp at the end of the day would have cinched it). I am considering a bit more the idea that a similar pattern might be playing out here:


And for anybody that is interested, here is my current EW count:

Nov 1

Gap down today, right into a big support zone. So far we are just hovering right above support and have been all day.

Today felt a lot like Sep 22. In fact my main indicator had also the same rate of change profile for the last 2 days as it did for Sep 21-22. It will be interesting to see how that plays out, whether this is a hold of support, or if this continues to break down.

The Real Macro Risks

Here is a good post by Warren Mosler.

The risk is not from US Sovereign Debt, the risk is not from 'bond vigilantes', the risk is not from relying on the 'kindness of strangers' to 'finance' the US. There are no US Government Bond Market 'Vigilantes', nor is the US Government 'financed' by anybody, it is the sole issuer of the US Dollar and is the source of all Dollars in existence.

So what are the real risks? This is one:

Meanwhile, the 1% running the US looks to be trying to take the lead in the global austerity race to the bottom as the Democrats in the super committee on deficit reduction have led off by proposing a $4 trillion deficit reduction package.

With the US consumer still in the middle of a balance sheet recession, and the Financial Sector still posing a risk to economic stability, and with the US economy having >9% unemployment and >35% labor under-utilization, and with inflation being moderate (and most of that is producer constrained cost-push inflation) and not even remotely demand-pull, we have no issue with the economy 'overheating'. We have a massive problem of deficient demand, and a $4 Trillion deficit reduction will be $4 Trillion sucked out of an economy when demand is already far too low.

Those who seek to massively cut the deficit (or worse, balance the budget) in the name of 'avoiding a Depression' will be the ones to cause it.

If this austerity effort makes serious headway, like I said here and here, then my sideways 'muddle-though' secular bear market projection becomes much less likely and something far more dramatic and bearish starts becoming probable.

Oct 31

My 60-min Trend System flirted with a buy and sell all day long, but by 3:15 issued a sell signal. See here and here. (These updates are sent out as part of my Trend System Notifications).

Long Term Thoughts on the RUT

Okay, it's time for Crazy Uncle binve's Unpopular Opinion and EW Count Time!

Today's installment will be regarding the Russell 2000.

First, let me say that this has been a point of particular focus of Blankfiend, such as this post and several others. I really appreciate his efforts because the RUT does not display the same characteristics as the other indices.

Second, let me say that I am expecting little to no agreement with this post. In fact, I am expecting to get a lot of disagreement / 'what are you smoking' type comments like those that I got with this post.

Third, I think most of the standard macroeconomic analysis that accompanies long term projections is partially if not completely flawed. I think only a tiny minority of analysts actually understand monetary systems. I think only a tiny minority understand that the US and the EMU operate under fundamentally different monetary systems. I think only a tiny minority understand what a sovereign debt crisis really is and the fact the the US has no sovereign debt crisis whatsoever (except for a self-imposed 'debt' ceiling constraint). There are no US Government Bond Market 'Vigilantes'. The US is not on the doorstep of a hyperinflationary depression.

I think I see things a bit differently than most TA and EWP analysts out there.

I view long term trends through the lens of macroeconomic policy decisions. And currently, while the US is cutting back spending, it is not embracing full-blown austerity. This means that current deficits of ~9% of GDP are supporting aggregate demand in the economy, and stocks can still generate reasonable profits and profit growth in this environment. Not stellar, but enough to limp along. Remember, the stock market is not the economy.

But there are major long term risks. NOT US sovereign debt (which is not a bubble, despite those trying to call the top in it). But the size of the financial sector and the continued financialization of the US economy. I think the financial sector, and the instability it promotes, is the biggest impediment to long term growth. And we saw from the 2008 crisis that the financial system was not reformed (even though we had our chance). TBTF was allowed to become TBiggerTF. See section 5 of this post.

My point is that the US can continue to limp along so long as austerity is not embraced (Of course, like I said here and here, if the US significantly embraces austerity, then all bets are off and look out below.). But that the instability that the Financial Sector creates will precipitate another cyclical bear market.

That in a nutshell is my macro stance:

1. We are in a secular bear market, because the cancer (size of the Financial sector) was never removed from the economy
2. The instability that the Financial Sector creates will precipitate another cyclical bear market
3. The next cyclical bear market will cause enough animosity that there will be political will to finally reform the financial sector
4. At the end of the next cyclical bear will be the end of the secular bear market (that started in 2000), and the next secular bull will begin
5. As long as the US does not fully embrace austerity, then a Great Depression-type scenario can be avoided. If it does embrace austerity, then all bets are off and look out below (and God help the US economy and population).

My long term thoughts that go along with these macroeconomic conditions are described in a few posts:

-- Update on Long Term Projection
-- Secular Bear Market Projection in Historical Context
-- Lessons (To Be) Learned... again.
-- Real Secular Bear Markets

Also, there is a lot of good background reading in this post: First Derivative of the S&P 500, Long Term Study and My macro tab.

So how the the RUT fit into all of this?

I think calling the RUT a major broad market index is misleading. I think the RUT is to the SPX as what JNK is to LQD (roughly speaking, I am *not* suggesting that all RUT stocks are 'junk' stocks). They each measure different things. But I think the SPX is a closer representation of the the expectations of what is happening in corporate America and the US economy than the RUT is. I think the RUT is a measure of smaller and much more speculative issues.

As such the RUTs gains and losses are much more exaggerated. And as the financialization of the economy continues and leveraged money continues to look for gains, it will find its way into riskier assets. And yes, I think the RUT is a much riskier asset class than the SPX. And so I think that this 'overshoot' phenomena to the upside on the cyclical bulls (and much higher than then end of the last secular bull) can be explained by this observation.

With that, here are my thoughts on the monthly chart of RUT:


I am calling the end of the secular bull in the RUT a bit earlier (1998) than then end of the secular bull in the SPX (2000). And what we can see is that the 'middle wave overshoot' phenomena occurs relatively early on in this large corrective period.

I think one of the keys to recognizing this is the fact that the move from 2002-2007 is clearly not an impulse. However you want to subdivide it, it looks and counts like a corrective wave up that goes to clearly new highs. Yet it is not an impulse (and hence cannot be the start of the new secular bull market).

The upshot is that I think the RUT, like the SPX, is in the middle of its secular bear market. And if I am correctly identifying the end of the previous secular bull (500 in 1998) then the next cyclical bear (and likely the end of the secular bear as well, subject to the macro caveats above) will make one more move below this level.

1000th post

This post is my 1000th post.

If you don't have anything of quality to say, make up for it in volume. That's my motto.

Or at least it would be, if I start having a motto.

Randomly Useful: Fibonacci Ratio Table (Updated)

This is just a mostly trivial update to the original post: Randomly Useful: Fibonacci Ratio Table. Added another calculation variant to derive a few more ratios and to show the coolness of the Fibonacci relationships via the fact that they can be arrived at multiples ways.

And no, just adding 1 or 2 to a ratio is *not* a valid technique to derive ratios (and yes, I am speaking to all the knuckleheads who still use 1.382 as a Fibonacci ratio)

------------------------------------

Nothing Earth-shattering, but here is a nice little table of Fibonacci Ratios. I actually generated this table a long time ago (6 months?, 9 months? edit 10/27/11: Okay, lets just say a few years ago :) ). Anyways, I would sometimes come across lists of Fib ratios. But as a guy who wants to understand where things come from in the first place, that was very unsatisfying.

The are many ways to come up with Fibonacci ratios besides looking at adjacent Fib numbers. There is the exact equation, which gives you the main one (0.618 and 1.618). But the most clever way is as a system of linear equations (and since I love linear algebra, this is very cool). I was planning on writing a really detailed post of why I love phi and going on a geek trip using linear equations, like I did regarding e as with this post: Why e is the coolest number. But I decided to restrain myself this time :)

Anyways, here is the table. Have fun! :)

Oct 27

:) This is is just one of the days/weeks that you have to look at with bemused detachment. First off, if you were long going into this morning, congrats! Like I said yesterday, my trend system triggered a cover signal, and almost triggered a buy signal. Unfortunately this one isn't horeshoes. No cigar here.

I guess why it is really annoying is because I am definitely on the bullish side of things with my outlook and have been for the last several months. But I don't trade my outlook, I trade my system. And there has been enough chop and loss of momentum to keep my long signals from triggering before the move happens (as opposed to the beginning of October when it captured nearly the entire move from Oct 4 to Oct 12). So the only thing I can do is laugh and shrug. I am not chasing it here, I will wait for the next pullback, even if it is just sideways consolidation. This is when it pays to be patient and to wait for the next setup. That's what I am doing at least. October has been very good for my trading account so far, I am not going to blow it at the end of the month by getting emotional about it.

One saving grace is that my Daily Trend System has been on a long signal since 10/10 at 1181 (see here). So while the chop the last week has been putting the hurt on my 60-minute system (and by 'hurt' I mean that it is getting shaken out before the real trend emerges. It is still up 0.6% for the last 3 trades and 10.6% for the last 4), the Daily System keeps rising. In fact the Daily Cycle signal is looking downright bullish.

A word on 'overbought'

I have been seeing a lot of posts talking about how overbought things are: 'the NYMO is crazy overbought!', 'the RSI is at hugely overbought levels!', etc. That may be, but I wouldn't take a short position based solely on 'overbought'. Markets can stay overbought far longer than they stay oversold. I even use the term overbought sometimes. But the point is that I never short based on that. I wait for my system to give a sell signal first (which has to have a little downward momentum behind it).

Oct 26

Whew! Now that is a crazy day. I am sure if you are a day trader (which I am not) then you are having a blast. But this is too much chop for my poor trend system :(

We had a crazy gap open (which did not trigger a cover based on the momentum down from yesterday) which sold off, but then the day bottomed and turned around and eventually came back up, and that is when the cover signal occurred (at the same level as the short signal yesterday = flat trade). No buy signal yet, but a strong day early tomorrow likely will. Chop, chop, chop ...

My 60-min Trend System issued a cover signal today as mentioned above. See here and here. (These updates are sent out as part of my Trend System Notifications).

Oct 25

The trend up yesterday turned out to be very transitory indeed. It could have been sustained with a sideways day today, but not with a gap down and then the selloff in the first 5 minutes the size of which we had.

So my 60-min Trend System issued a sell signal right after the open today. See here and here (which leaves a fairly small profit on the position opened Friday), and then after the day wore on a short signal was given. See here and here. (These updates are sent out as part of my Trend System Notifications).

No idea if this is just a correction or the start of something bigger, so we will just see where this goes.

Oct 24

Today is confirming the breakout up. This is good to see. Now is where things get interesting. We have the resistance zone at 1255-1260 and we also have the 200 DMA at ~1275.

Currently the breakout is not as dynamic as the rally from Oct 4 - Oct 12 (which was pretty spectacular by historical standards in terms of slope and size), which is not surprising. My trend indicators are all saying (so far at least) to expect a more subdued rally. So I bet we move slowly into that resistance zone over the next couple of days.

And I wouldn't be surprised by a pause there (and maybe even a sell signal). Just because we get a sell, doesn't mean it is time to crash. It could end up being simply a mid-rally correction (like Oct 14-19). I will be listening to my trend system and if it says to sell and go short, I will do exactly that. I honestly have no expectation about the next trade. (And no matter what I think about the state of this cyclical bull market, I will not let that bias my observations about what is happening on the trading timeframe).

It also pays to make the observation that everybody who is *expecting* 'Minor 3 down' (despite my demonstrations as to why that count is invalid) doesn't get too biased themselves. This market is overbought on the 60-minute timeframe again. But is not even remotely overbought on a daily or weekly timeframe. And after a correction, it still has a lot of room to run up, if it so wants to.

Oct 21

Hmmm.... this is a not a particularly compelling day for anybody (bulls or bears).

First, my 60-min Trend System issued a buy signal with the gap up today. See here and here (These updates are sent out as part of my Trend System Notifications).

But was today a breakout or a bull trap? The evidence right now is mixed at best. The SPX broke out to a new high, came down retested previous resistance (now support?) but failed to go back to the high. That doesn't seem particularly strong. But the day is what the day is and I still have a buy signal in place. So I guess we will see what happens over the weekend.

Oct 20

So my ideal setup that I discussed yesterday manifested on the Nasdaq ... but not on the SPX. However, it is looking to me like the move on the SPX could be a triangle. If these theories are correct, then tomorrow should be a breakout day. Should be interesting. Either a breakout or a breakdown here will be telling for what will happen for the next few weeks.

An Interesting Parallel

There has been some talk recently comparing this pullback and the pullback in 1998. Some good posts on this have been by Doc Barter and Fearless and Volar. And I am also going to throw in an interesting observation made by HighRev that feeds into the comparison below. I decided to take a look and I was also struck by a large number of similarities.

1998

present


So we are at a very interesting confirmation point right now. A break up of the small range at the top of the large range will be a very strong support of the comparison thesis.

Now I am sure that I will get a bunch of comments talking about my 'bias'/'loss of objectivity' like I had in this post: Revisiting the Large Count. But if you read this post in its entirety, you will understand where I am coming from.

I have pointed out a number of evidences in the past several months as to why the May top is likely not 'the' top. Yet am I not being permabullish. I am simply in no hurry to call the end of this cyclical bull market complete. And with all of the bearishness out there, my contrarian spidey-sense makes it seem like this whole mini-panic in Aug/Oct is a correction to be bought in the bigger scheme of things.

Oct 19

Yesterday did turn out to be a bunch of gamesmanship after all. And my nascent buy signal (as I discussed yesterday) that I didn't trust turned out to be correctly untrustworthy. And then today I got a sell signal again .... :)

So I am not trusting anything in this range of OPEX induced volatility and will wait for a breakout and/or compelling setup. This is one that I would particularly like if it were to happen:

Oct 18

Wow, this is just insane. I was expecting some volatility and fireworks but this is ridiculous.

First, 60-min cover signal was issued. Small loss from yesterday's signal. But right now it has just flashed a buy. .... But I really think the setup stinks. Way overbought, and coming off the heels of a pretty solid sell signal. Today feels very 'reactionary' (a bunch of OPEX gamesmanship). So I would like to see some more follow through tomorrow if I am going to take this move seriously.

But we did have a move down and strong bounce off of the 23.6% retrace (like I was highlighting yesterday). It just seems to me like the pullback has not taken enough time yet. We'll see.

Oct 17

My 60-min Trend System finally rolled over and issued an official sell signal today. See here and here (These updates are sent out as part of my Trend System Notifications).

How far will it go down? I have no idea. But here are a few points to consider: This is OPEX week, so expect some craziness (volatility early in the week, with nothing straight up or down). Also there are several key companies reporting this week (see: here, h/t Tasty), which should add to the 'fun'.

Here are a few levels for both shallow retraces and deeper retraces:

Oct 14

A crazy couple of volatile days, and I am glad that I got an early signal:

So now is where things get interesting. My 60-min Trend System issued a (quasi) sell signal today. See here and here (These updates are sent out as part of my Trend System Notifications).

Now I say a quasi sell signal because my main indicator has not officially triggered one. It is slowing down but it isn't there yet. However:

- 3 secondary indicators have issued sells (these are normally confirming indicators)
- The move has gone back to the top of the range (resistance for the last 2+ months)
- The move is overbought on several <=60 min timeframes
- My system made 10% off this move in about half as many days.

Currently my 60-min Trend System *still* hasn't issued a sell signal. But it has almost finished rolling over. And with any decent pullback on Monday (which looks likely) then it likely will.

Today looks and feels like an exhaustion move up and we will finally get some kind of pullback. I was glad to stay out of the market the last couple of days. I had a small short position that was triggered by my 15-min system but it got caught in the cross-fire of the gap up this morning (just par for the course for the volatility at the end of a spike move).

I am going to wait for a clear signal from my 60-min Trend System before I make my next move.

Revisiting the Large Count

Okay, it's time for Crazy Uncle binve's Unpopular Opinion and EW Count Time!

Last week (during another episode of Crazy Uncle binve's Unpopular Opinion and EW Count Time) I was showing this count. So far things are going pretty close to script. Move up the the top of the range. Pullback/pause. Then after that we will see how the next act moves.

But I have been thinking .....

Here are a few consensus views that seem to be going around in the EW and macro spheres:

1) The vast majority of EW blogs seem to be counting this as a Minor 1 down that ended on Oct 4 and we are in a Minor 2 up (with the dreaded Minor 3 down to come). There seems to be a sense of inevitability / preemptive vindication about this stance.

2) The macro commentators are just flabbergasted that the Eurozone is not immediately imploding. "Dexia getting bailed out and nationalized", "Slovakia not agreeing to debt terms", "Italy is teetering on the brink of default", etc. etc. So there seems to be a widespread belief that this is just a relief rally because things moved down too far too fast in August. And we will be seeing these economic problems manifest in the stock markets (Eurozone and then a contagion to the US) in the next couple of weeks/months.

3) Recession warnings are popping up all over the place. ECRI (who has never flubbed a recession call, granted in only a 15 year time span) is saying that a new recession is inevitable. It seems like the majority of economists are either outright pessimistic or have curtailed optimism greatly.

Hell, even my recent counts are showing us that we completed a W down, we are in an X up, and so we will be making a lower low in a Y wave early next year.

The view seems overwhelmingly biased that we will be making a lower low across the analyst spectrum. In preparation for this 'inevitable crash' short selling reached a significant peak recently.

Of course there are contrary bullish voices out there, but from my (hopefully objective) assessment, they seem to be in the minority.

I have made the case many times that this cyclical bull market is likely not over:

-- Yet another reason why I don't think we saw 'the' top
-- Yet another reason why I don't think this cyclical bull is over
-- Update on Long Term Projection

However my original thought was that this mid-bull interlude would last longer. But with all the bearishness out there, now I am not so sure.

So I am revisiting an idea that ZimZeb and I were hashing out at the end of August. It has to do with some time relationships, and it comes from this comment thread. Here is the relevant excerpt that I will be discussing:

I also was doing some (likely erroneous) time analysis and comparisons, it goes something like this:

Call March 2009-May 2011 Primary W. = 2.15 years

Primary W is made up of Int W, X, and Y. The time ratio of Int X (0.22 years) to Int W (1.12 years) is 0.196.

Apply to Primary W => 0.196*2.15 years = 0.42 years (~5 months)

If Primary W started in May 2011, then if it obeys a similar time ratio, then it would end in Oct 2011.

This is what I wrote in August, and didn't think too seriously about it.... But now I am. Because in that same comment thread, you can see that one of the criteria that I was looking for (and didn't happen in August) was PPO divergence at the bottom. But with the October low (which could arguably be a capitulation bottom) we do have one.

So that means I am starting to think more seriously about this count:


The bottom of the Jul 2010 wave and the Oct 2011 wave display PPO divergence (blue indicator at top) [for an explanation of the PPO vs. MACD, see here]. I don't use the standard 12,26,9 settings (because it is too fast to be useful) and I like to slow it down to 14,30,10 which responds a little more slowly and less erratically.

This is certainly far from 'proof' of a bottom (which I guess the 'proof' would be a higher high above 1370, which is not particularly useful from a trading perspective) but says at the very least:

1) A tradeable bottom is in and any pullback should be bought for a couple more weeks of upside
2) The *potential* of a more significant bottom ('the' pullback low before continuation of the cyclical bull) is in.

Like I have said before, I don't let my expectations get in the way of my trading: Regarding Trading Positions and Long Term / Macro Outlook. But the point of this post is to illustrate why I think for the intermediate term (weeks/months) and potentially for the longer term (several months/couple of years) the risk is to the upside, not the downside.

Of course, like I said here and here, if the US significantly embraces austerity, then all bets are off and look out below.

So *IF* my theory about a significant bottom is an accurate prediction, then the longer term landscape could look something like this: