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.