Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Bear Capitulation? by Market Sniper

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Change in bearish sentiment in the air? Perma-bears starting to give up the ghost? The signs are everywhere. From this blog to the few remainind bear blogs, the bears are giving it up. Lot fewer "top callers" out there and I suspect the few that continue to call tops either do not trade  or have  little "skin" in the game. This is one if not THE most magnificient bear market rallys of all time. It continues to be my view that this is a cyclical bull market within a long term secular bear market. I will need to see the popular indexes all eclipse all time highs to change my opinion. Can that happen? Yes, of course, anything is possible but as a probabalistic thinker, this is still of a lower probability. I have often stated that the job of the secular bear market is not to reward bears and punish bulls, it seeks to wipeout both. So far, it is doing a very decent job of getting that done. There is one thing I know with absolute certainty: the higher price climbs through time, the closer we approach that inevitable top,  both in price and time. How does one attempt to identify a top? Here are my views and observations.

Anatomy Of A Bull Market And The  Top: The first thing to consider is that market cycles and economic cycles are two distinctly different cycles and they are rarely in sync. A bear market low is the incubator for the next bull market. At the bear market low, economic news is nearly uniformly bad. As the last exhausted bull finally throws in the towel and sells, more bad economic news no long causes price to fall. Margin buyers are gone, wiped out for the most part and there are no more sellers. Now as economic news continues to worsen, price starts to rise. At first there is widespread disbelief. This disbelief is fueled by a number of factors. Humans are social animals with herd instinct. We like to fit in. To go against "group think" invites exclusion from the group. Due to continuing bad economic news, group think is of the opinion that price will continue to decline. This goes to the heart of Recency Bias which states that what has happened in the most recent past will continue to happen. This is normal, indeed, hard wired and probably has its roots in our specie survival tool set. As price starts its ascent or no longer is falling, some short sellers begin to take profit. This starts to move price  higher. Early trend traders, usually trading in shorter time frames, detect the trend and start to buy. It should be noted that during the first phase of the new bull market, like we witnessed after the March 2009 low, there are numerous pullbacks in price. This is due to the remaining herd mentality selling into rising price as well as weak early bulls taking profits as they, too, do not believe in sustained higher prices. These pulbacks allows more buyers to enter the market.  While this is happening, fundamental analysis becomes more positive, enticing fundamental traders/investors to begin to enter the market on the buy side. A trend has started to be recognized by some in the herd who also start to buy. At this point, opinion is split as to IF rising price is sustainable or not as economic news is also mixed. Continued rising price now becomes a readily recognizable trend and momentum /trend traders continue to buy. Rising prices continue to bring in more buyers as the news drumbeat becomes even more positive and/or is "interpreted" in a positve light. Now the "herd" is almost universally bullish. Market bears now start asking such questions as "is technical analysis dead?" as tried and true techincal indicators and chart patterns more often than not, lead to a failure of the "next technical expectation." The failed head and shoulders formation of early July 2009 is the best example of that. There is a saying "out of failed moves come rapid and sharp moves in the opposite direction." The rally into late September of 2009 off the failed formation did NOT allow pullback buying bulls into the market as there was NO pullback. This marked the second phase of this cyclical bull market. Price then consolidates such a large rapid move in basically a sidways or "channeling" market. The channel normally has an upward bias, however. This marked the third phase. The fourth and final phase is now what I believe we have just entered possibly as early as September of 2010. The final phase of the cyclical bull can be marked by a number of observations. Remaining bears continue to short into rising buying pressure and exit more swiftly (adding to buying pressure) with losses. Some, capital depleted, are out of the market. More decide to just sit it out. Overall short interest starts to drop.  Mutual fund cash flows now reverse. Mutual fund money (the dumb money) flows into the market fueling further breakouts to higher recovery highs. Fund money now is much closer to being fully long. Fund managers are the epitomy of herd animals as they chase each other's returns. The concept begins to gain  wide circulation that this cyclical bull is NOT just a cyclical bull but rather a NEW secular bull market and that the all time highs will be soon eclipsed. Throw this into the mix as well: historical seasonal negative influences also seem to be no longer valid.  How does it top? When the last buyer has bought. This can come in two forms. Either a rounding top formation showing distribution or a "blow off" top. I favor the second scenario as to what we most probably will see. This is a very sharp spike upwards. The last of the shorts cover (no more captive buyers) and the very last of the dumbest of the dumb money comes in not wishing to "miss the move to infinity." What you will see at this point is that more positive news no longer propels the market higher. In fact, price may start to "retrace" on good news. The secular bear market now re-asserts itself as price starts to plunge.

As NOBODY knows what happens next, I have no time frame for when this occurs or from what price level the market puts in its top. Tops, like bottoms are a process. They are events only in hindsight. I have attempted to give you some guide posts to that event. As an additional observation, one that could be huge, the very nature of the markets we trade have changed. Analogues to past bear market rallies can fail for the following reasons. Recent changes are the replacement of fractional price with priced in pennies. The advent of the electronic market place changed markets as well. Now, add to the witch's brew the following: the massive intervention in the markets by the central banks and governments, the advent of dark pool trading (beware those of you looking for price/volume divergences!) and HFT (high frequency trading by machines). But the largest change could be the fact that approximately 75% of all trading is now institutional trading. The retail trader has an ever shrinking portion of market impact.

This is all well and good but how is this information actionable? That will depend, as always, on the time frame you choose to trade.

Day Traders: a day trader should have no directional bias when trading. Most important is to try to discover what kind of day it will be as soon as possible as therein lies a very large edge. There are five different types of days. 1) Nontrend day. The market shows little or no extension in price beyond the first hour's range. 2)  Normal day. Shows a directional bias of about 50% of the first hour's range. 3) Normal variation day. The range is expanded by around twice the opening first hour range. 4) Trend day. Price moves dramatically out of the day's opening range and closes close to the extreme direction of the move and 5) Neutral day. Price extends in both directions from the opening range but nets out little to no price change at close. Tip: Trend days normally are around 1 out of 8 trading days. As market get closer to tops/bottoms, trend days become more frequent. Tactics and setups will shift according to what type of day you are trading.

Swing Traders: your swing trades should be in alignment with the intermediate trend. Do not attempt to pick tops in your swing trades. You are trading against the trend and immediately have one strike against your trade. As an example, I sell option credit spreads. I prefer broad market ETF's and broad market futures options when doing this. Each time I have attempted to counter trend trade these (selling bear call credit spreads) by being "cute" and "thinking" a very short term top is in, trade result has been less than stellar. Here is another tip: On page B2 of IBD (Investor's Business Daily) for the NASDAQ and the S&P 500, there are charts. In that chart (close to the top) is a letter grade. A through E. This is accumulation/Distribution. A-B is accumulation. C is neutral and D-E is distribution. When the letter grade changes, through time, two full letters, might want to reassess your market stance.

Position Traders: I am of the firm opinion that position trades, held for long periods of time, should be based strictly on fundamentals. Technicals can and should be used for entry and exits only. Make certain your trade size in this type of trade is in alignment with your risk tolerance and business plan for such risk. Over time, price can fluctuate radically, often not in the direction of your trade. The last thing you would like to see is getting stopped out of a long term trade only to see your long term fundamental assessment later confirmed by price.

I hope this is of some help and benefit.

Yours in the never ending search for the trading edge-Market Sniper 

 

SPY- A Historical Perspective (by BKudla)

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SPY is entering into its quarterly correction zone, and as we enter into the zone, what can we expect?

The first chart I created looks back 11 years to give us some perspective.  The findings are actionable; The market actually goes down during each of the first quarters examined. On average the moves are large enough and long enough to make a trade worthwhile (36 days, 13 SPY points, 14% move). 

My view is this correction will be longer and deeper than normal, as the price to 200 day is extremely stretched, and the run up has been particularly persistent, and calm.

Looking at the third chart informs me when I should make my move.  Initial position when either MACD crosses or Stochs break the 70 line, and full position when both are triggered.  Looking at the second chart, we find obvious support and a rising 200 day in the same area of past historical correction percentages.

So my trade is a 14 point March debit Put spread.  I will use an initial stop loss, then look for a hammer or swing low to adjust or exit my trade.

Spy_2011-01-15_0503 
SPY_2011-01-15_0510 
Spy2_2011-01-15_0515 

www.arum-geld-gold.blogspot.com

Silly Cycles

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Happy Boxing Day to everyone out there. I'm typing this on a pitch-black Saturday morning with a freshly-fallen crest of snow outside the door. The "what on Earth am I going to write about today?" ghost was haunting me, but I landed on one thought I'd like to share.

The year 2010 – – notably, almost every day since the Jackson Hole speech in late August – – is one I would not ever want to repeat. Through all the pain, however, I've learned some things. I've learned to be a lot more "blended" on the bull/bear side (which is definitely helping me this month); I've learned that the target interest rate is far from being the only tool the Fed has at its disposal (and, boy, is that an understatement); and I've learned to regard prognostications about cycles with little more than a grain of salt.

This was on my mind, since I read that Peter Eliades went on MarketWatch last week to share his target of 1500 on the S&P in the first half of the new year. My experiences in 2010 have taught me to regard projections based on cycles as pretty much meaningless, even though they still get plenty of media coverage (I suppose because the public has a really, really short memory).

I was reminded of this today when I read the Terrible Ten article on MarketWatch by Peter Brimelow, who noted the ten worst newsletters of the year based on performance:

Martin Weiss’ Safe Money Report, Martin D. Weiss: -6.0%

Peter Eliades’ Stockmarket Cycles, Peter G. Eliades: -8.1%

TimingCube, F. Minssieux: -9.0%

Bernie Schaeffer’s Option Advisor, Bernie Schaeffer: -11.0%

Crawford Perspectives, Arch Crawford: -12.4%

Brown’s Investment Signals Mid-Term Model, Stephen Brown: -12.7%

Sy Harding’s Street Smart Report, Sy Harding: -13.8%

China Stock Digest, James Trippon: -15.9%

Cabot China & Emerging Markets Report, Paul Goodwin: -17.1%

Doug Fabian’s ETF Trader, Doug Fabian: -21.5%

One may wonder where a newsletter from – oh, say – Gainesville might be on this list. I suppose it's impossible to "track" performance when a newsletter pretty much says any of x-quantity possibilities may or may not happen immediately, in the near future, or never.

The fact is that the market tends to move in broad trends, and reliably predicting those trends is impossible on a consistent basis. Those who tilt bullish look brilliant during years like 2010, and those who tilt bearish look brilliant during years like 2008 (the converse holds true as well, of course).

I'm a stock-by-stock kind of guy. I look at a huge number of charts every day, and I try to make the best decisions I can on an individual basis. When the market sweeps broadly higher, it doesn't matter how good my short picks are – – they're going to get clobbered. But by keeping my eyes open for both bullish and bearish opportunities, I try to open myself up to upside potential irrespective of the market's direction. The hope, of course, is that the positions on the wrong side of the market will lose less than the gains enjoyed by those on the right side of the market.

If nothing else, I would close by saying take the sweeping predictions – – which are manifold every time the old years gives way to the new – – with very little regard. The predictions of the experts are, at best, no better than yours.

 

Merry Christmas! (by Molecool)

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That's right – I revel in being politically incorrect. It's almost Christmas on my calendar and I enjoy responding to 'Happy Holidays' wishes with a Clint Eastwood sneer and a stubborn 'Merry Christmas to you too!'. Anyway, after being pounded by a six day series of rainstorms the heavens suddenly opened up yesterday afternoon to bestow Los Angeles with a beautiful Christmas present:

Contrast that gorgeous view with the nasty weather Europe is having to put up with right now and you understand why I moved my Teutonic butt to California almost two decades ago. As much as I cherish the Christmas season – I can assure you that winters in Europe (as on the U.S. East Coast) are no laughing matter. You just can't beat the weather down here in Southern California.

The smoothed version of the daily Zero has breached that lower support line and is now clearly pointing down. A signal like this usually suggests that some kind of reversal is on the horizon, but if we're objective here the signal has been in the negative for a while now. So, it'll better happen when it's supposed to happen – which is usually in the first two weeks of January. Let's wait for that and then revisit this chart to see if it's supportive.

You may remember my spiral calendar chart which I pull out of my head every once in a while. If you don't know what this means then just use the search box on your right with the keyword 'spiral calendar'.

Another reason why we may be heading into some type of correction are two major cycle intervals – one being a F21 (i.e. 3090 days) and the other one being an F17 (i.e. 1180 days) – shown on my SPY chart above. In terms of sheer seasonality and given the current bullish exuberance exhibited by the longs the overall market conditions do support a drop. Why a drop? Well, we have been melting up forever so a turn date for the longs would not make any sense. Of course we have seen cycle dates come and go before – granted, none of them was above F20 and as far as I understand it the longer term cycle dates do carry a bit more weight. So I'd give this one much higher odds than any of the dates I've shown here previously.

Alright – one more before I hit the eggnog. I'm sure many of you are familiar with the concept of average true range (ATR). If not do a google search or just believe me that it's an important measure of volatility. And while we've seen volatility on the (un-smoothed) daily Zero increase it's been dropping like a rock on the nominal side of things. When the longs get that complacent and everyone expects stocks to keep taking the express elevator up bad things usually happen. Case in point – take a peak at similar readings last January and then again in April. Of course what's also apparent from these prior readings is how long things can stretch out. So, we may have to wait while equities paint a blow off top before we'll see a meaningful drop. Given the onslaught of POMO auctions scheduled for the next few weeks I would not be surprised to see exuberance get completely out of hand.

Mmmh – actually that ATR observation got me thinking. How difficult would it be to slap an ATR on the daily Zero?

UPDATE: Well, I decided to get off the eggnog and hack together my first draft of the proposed ZeroATR:

Not so shabby – is it? I can probably fiddle with this a bit more but it looks pretty valuable to me. I'm going to slap it on the hourly and ZL as well and see what happens. Stay tuned on that end 😉

Wishing all of you Slopers a very Merry Christmas and a happy new year!!

Alright, here's your f*cking Christmas card – now go away.

Cheers,

Mole