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.
Are We There Yet? Yes! (by Springheel Jack)
Well we blew right through the resistance that I was really expecting to hold on the SPX yesterday. Fortunately I was given some warning because I had been playing a classic broadening top pattern both short and long on the ES all day. I saw a partial decline and return to the top trendline which was an early warning signal for the upside breakout that followed shortly afterwards:
I really had expected the resistance to hold though, so I went back to my SPX charts to see what I had missed. I came up with the following SPX 60min chart which at first glance at least made very depressing
viewing for the short side:
There were a number of interesting things to note about this chart.
Firstly it is now obvious that what at first appeared to be a rising wedge on SPX was in fact merely the top diagonal half of a channel which only later became apparent. This is of course exactly what happened in the broader SPX uptrend since last March, where the main rising channel also appeared to be a rising wedge until the bottom was made on Feb 5th, and the perfect rising channel was then revealed.
Secondly we closed at my last significant internal line of resistance yesterday, and if we broke through it today then I could see no significant resistance until we reached the top of the current channel in the 1190 SPX area. That target was reinforced by the slightly dubious quality IHS that has formed in the last few days, with the neckline broken in the last hour of trading yesterday.
Thirdly the SPX wave structure since the bottom on Feb 5th looks very obvious from the chart, with a first, second, and ongoing third wave structure apparent. That would make the imminent interim top and retracement a wave four of course, and I saw a very nice count at PUGridiron's blog after I had depressed myself completely by doing my SPX chart. Here's his take on the current wave count:
Now with the greatest respect to EWI enthusiasts, Occam's razor tells us that the simplest explanation is generally the correct one, and on that basis the primary count for the market we see before us has to be that we are now in the fifth wave up of a bull market wave up since March 2009, and that we are currently in the third sub-wave of that 5th wave. Looking at the wave structure of that third sub-wave, I would agree also with Pug that we appear to have been playing out the fifth subwave of that 3 of 5, and that the interim top and correction that I have been expecting would therefore be the end of that wave and the fourth wave retracement after it.
The bad news is of course that after the fourth wave retracement, there will be a fifth subwave up to take us to the final top of this bull market wave sequence, and the good news is that we should then see a deep abc correction of the full move since the March 2009 bear market bottom.
USD is important here. I've been writing over the last few days about how a new USD wave up is likely to coincide with sideways or negative equities action in the next couple of weeks, and I was remarking to Anna yesterday that a good confirmation signal that an equities interim top was in would be a new high in USD and new low in EURUSD. That is exactly what we have seen overnight. Here's the USD 60min chart at the time of writing:
We're seeing the same picture in mirror image on EURUSD overnight with the strong support from the previous low broken with an impulsive wave down:
The USD target for this wave up is the rising channel top in the 83 area, and the EURUSD target for this wave down is the declining channel bottom in the 1.29 area.
So what does this mean for equities?
Well USD hasn't been a particularly reliable guide lately but it is now likely that we have seen the short term top in equities at the close yesterday, though a rise a little further to the wave 3 channel top and Pug's target at 1189ish is not yet completely off the table.
In my view though, we have seen the wave three top, or are about to slightly higher than yesterday's close, and that view is strongly reinforced by the following SPX daily chart, where we are right at the top of a six month internal channel within the main SPX rising channel:
What are the targets for this retracement then? Well if Pug's wave count is correct then it cannot be lower than the top of the first wave at SPX 1112.42, and I still favor the 61.8% retracement of wave 3 at 1120 SPX, which is also the mid channel line of the six month internal channel on the last chart above.
We may not get that far though, and the other likely targets are the 38.2% and 50% fib retracements at 1140 and 1130 SPX respectively.
This will be a pleasant interlude for the bears before the next wave up. Everyone have fun trading it!
Good news & Bad News (by Springheel Jack)
Well the ES rising channel was broken on Friday, and the chances are that we will see some kind of retracement this week:
USD has bounced on the bottom of the rising channel and looks likely to have started the next wave up:
Other indicators are encouraging too. $BPNYA is at a likely turning point, even if the declining channel now looks more like a broadening descending wedge:
$NYMO looks likely to turn here having reached a good level to turn, with an H&S pattern and negative divergence on RSI and the ultimate oscillator. The larger patterns are hit and miss on $NYMO, but the smaller patterns generally play out for a significant interim top.
CPCE has also reached a significant trough level and then turned back up, which it generally does before retracement begins in earnest:
The real question is how significant an interim top this is likely to be though, and for that I would turn to the GS chart, which I think might well be a good proxy for the broader market.
The GS monthly chart has some encouraging features to it, and GS has been closing on a monthly basis within this long term declining channel since the peak in 2007. It is trading above it for the moment but as long as it closes within the channel by the end of the month that channel is holding. If that channel holds this would be a natural point for the rally to end, and a break on a monthly closing basis of the rising trendline just below might give us the signal that the rally was over. :
Unfortunately though, there is much more to the GS chart than the declining channel. On the weekly chart I have marked up the huge potential IHS on the chart together with the second IHS building in what would be the RS for the larger pattern.
Now the good news is that this also backs up the thesis that there is a
short-term retracement that has just started. If the smaller IHS
continues to build then GS should pull back to the main support
trendline just over $160, which makes it a good short in the short term.
The bad news is that unless GS breaks that rising trendline, that is one very bullish chart. The smaller IHS indicates to $210, which would confirm the larger IHS indicating to $335. If GS were to get to the smaller target, that would be fairly bullish for the general market over the next two or three months. If the larger pattern were to play out, and we have seen a lot of huge IHS patterns play out over the last year, then it is difficult to see that not being enormously bullish indeed for the equities market generally.
It could well happen. We are already in a valuations bubble inflated by huge government borrowing and stimulus. Bubbles can inflate for quite a while and I can't see much sign at the moment that the supply of either mindless optimism or government credit is becoming too strained to continue.
I'll be taking a spec long on GS at $162,50 with a stop just below the year's low, because that is where the IHS would be invalidated.
Hope for the best, but plan for the worst!
Correction Higher In Risk (by cantabnomad)
Equities and other risky assets will likely sell-off hard fairly soon. I consider it highly unlikely that sustained upside progress can be made.
Below is a daily chart of the German DAX. This is my count and projections, unchanged from January 2010.
This is an hourly chart of mainland Chinese large caps traded in Hong Kong (the H-shares index). This index is weaker than the Hang Seng, and failed to take out the resistance highlighted by the red box. From Elliott Wave perspective, the rally from February lows has been corrective and is very likely over at current levels. This index is putting in a massive, massive top. All this for the companies that cater to the market that will save the world in 2010???
Governing Fundamental Principles of Financial Markets (by George)
I have observed that the Non-Farm Payroll economic release
and the FOMC Rate Decision are usually days that mark the end of the prevailing
stock market trend. I believe this is essentially a fundamental, rather than
technical, phenomenon.
The prices of the stock market are related to these five
essential macroeconomic factors: consumers spending and savings, the business
cycle, fiscal policy, and monetary policy. Of these, the market seems to
acknowledge consumer habits and monetary policy to be the most important
factors. The former is represented by payroll data, and later by interest rate
policy. (The weight of two of the ten leading economic indicators, related to
monetary policy, has accounted for 40-60% of the index.)
There is a consensus view of the employment data and the
rate decision, and as the release approaches, the market tends towards the
valuation “justified” by the coming data. This is just like a stock price
rising in anticipation of an earnings announcement. Once the data is released, “sell
the news”—the data becomes fully discounted and the trend towards the next
release, a month or quarter later, begins.
That is one very viable explanation for this trend reversal
phenomenon that occurs consistently in the stock market. That prices did not
reverse after last Friday’s payroll data, and will reverse at or near the Fed
announcement, tells me that the financial markets are currently more concerned
with interest rate policy than the economy. Changes in this policy can create a
change in investor mind-set that governs the next long term stock market trend.
Why is monetary policy so important? It affects the economy
and inflation, and also the supply and demand for investments—bonds versus
stocks. I will end this brief essay with an excerpt from a brilliant and
eye-opening passage, taken from the book, Inside
the House of Money. Read it carefully, and many times, and return to it in
the future:
There is only one true macro
trade, and that’s the price of money. Everything else is a function of the
price of money.Central
banks control the price of money and drive everything with their central bank
rate. They use monetary policy to get supply and demand moving in the economy
by encouraging people to move out along the risk curve. The risk curve, in
essence, is the credit curve.There is
really only one central bank and that’s the U.S. Federal Reserve. The Fed sets
the price of money.In actual
practice, the price of money is not the Fed’s overnight rate, but the interest
rate that corporations use to evaluate investment opportunities. I would argue
that’s the 18-month and two-year interest rate. From there, you move out along
the risk curve to government bonds, corporate bonds, and then to equities. At
the tail end, you have foreign exchange fanning out.
