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.

So What’s Different?

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There are five main kinds of posts I put up on this blog:

+ A "one-off" idea – usually a simple chart with its symbol and a declaration that I'm going either long or short the position;

+ A group of symbols, collectively presented as long or short ideas;

+ A goofy or musical video;

+ A video I've made discussing market direction;

+ An essay about something that's on my mind

This posting will be the "essay" kind, since I'd like to talk about my recent success with trading and what it's meant to me. More importantly, I'd like to go over how it informs my own trading.

Most of you know that I started managing money professionally late last year. The response to my new career was enthusiastic, and a large number of clients joined me in my new venture. I obviously want to do very well for them as well as myself.

In retrospect, it was a challenging time to start a fund for someone with a bearish tilt, since there was a huge stretch of time – November through April – that was, on the whole, wildly bullish. Through a combination of judicious risk management and an only partial deployment of my buying power, I was able to contain losses. But, let's face it, a loss is a loss, and dealing with a string of losing months stunk. It was more emotionally draining that I can describe with words.

Over the past few weeks, I have been trading extremely effectively. In the span of just a dozen days, I've undone a half a year of self-inflicted damage. Being able to perform at my best, virtually on a daily basis over the past few weeks, has been enormously encouraging. It has also been marvelously healing for the portfolio I manage.

So what's different? What changed? How is it that I've put together an almost uninterrupted string of days whose profits were so strong? This is something I've thought a lot about, because I really, really like this feeling, and obviously I'd like it to continue – – well – – forever.

Although it's no explanation, one thing I can say is that I've been very in synch with the market lately. Do you remember biorhythms? Those were the goofy graphs that were really popular back in the 1970s. They supposedly helped you understand how, based on time, you were going to get along with the rest of the universe. I've never put much stock in such things, but I was reminded of the subject when thinking about my own relationship to the market.

For a long time, particularly during February and March, I found the market agonizing. I felt utterly out of synch with it. Charts didn't make sense. The market's behavior didn't make sense. I started to wonder if technical analysis even worked at all. I scoffed at techniques, such as Elliott Wave and cycle analysis, which I felt had held such promise. I couldn't seem to make trading work for me anymore. I felt confused, inept, and – at times – helpless. And all through this time, I was really, really trying my best to be a good technician and a good trader.

In April, things started to slowly come back together for me. Keep in mind, the market kept climbing through April 26th, but even before then, things seemed to start to 'behave' better for me than they had in a while. As April turned into May, things kept getting better. I started having days whose profits were larger than I had ever had. I mentioned having a "record day" more than once, since I kept beating my old record. Even trading things like precious metals and natural gas – – and even FAZ and SRS! – – started going my way more often than not. I was on a roll again.

What's the reason for the change? Since Goldman has felt the heat of government inquiry and public scorn, have they pulled back their interference with the market? Maybe. I've got to say, starting with the (glorious) day that the government announced its civil suit against Goldman, the market has been working much more like I'm accustomed. Charts work again. Trendlines work again. Perhaps the market is being permitted to act like itself.

Another big aspect of this is trend. We're actually getting up-and-down patterns that make a certain amount of sense. Indeed, on that fateful day when I stood back from my Macintosh, stared at the screen, and made my prediction about what was going to happen, I felt uncomfortable, since so many of my predictions had a monkey wrench thrown in them. The fact that, move for move, everything went as I believed, was both gratifying and confidence-building.

The key right now, of course, is not to blow it. Indeed, I hesitated putting a check in the "Victory" box when choosing categories for this post, since the superstitious side of me is terrified of jinxing something. I've even considered dumping Victory as a category altogether, since I figured I'd never, ever want to use it again. It seems too much like tempting fate. But I run an honest blog, and I feel victorious, so I'm going to mark this post as such.

There's a difference between victory and hubris, however. As I made clear earlier today, I took my heavy foot off the pedal. I have no "ultra" funds at all. I have no large short positions on. I've got a series of large long positions to balance things out. And my portfolio commitment is smaller than it was.

I think one lesson I have firmly embraced through this entire ordeal is that it's good to be "light" in one's portfolio when things aren't clear as a bell. I was confident during the past few weeks about my point of view, so I could actually put on large positions, including double- and triple-ETFs, and still sleep reasonably well at night. I also had to be aggressive in order to claw out of the hole I was in. I'm glad that I was daring, but now that I've made so much progress, I am adopting a more conservative position until we're back to "clear as a bell" on the charts again.

As I said, I have felt very in-synch with the market, and as long as I continue to feel this way, I'm going to continue shaping my portfolio – either bullish or bearish – in the way the charts tell me. As I fall out of synch, as inevitably I will, I will back off – – way off – – and get very light. Your understanding of emotions and the market is vital to trading success. Likewise, your understanding of how aligned you are with the market's machinations is, I believe, a vital guide to how aggressive you should be (up to and including being purely in cash).

We are living in historic financial times. I see politics, business, and history through the lens of charts, and because of all that, it is a fascinating daily exercise. One's personal experience with the markets demands psychological self-awareness, and, from what I've experienced, I believe it is a lifelong journey. These have been my own thoughts about what this journey has been like for me lately, both on a long and hard road, as well as the recent weeks that I've had the profound pleasure of creating and living.

Blood in the Water or Getting Greedy?

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Hope you are all enjoying the fireworks.  I'm here to throw some cold water on that. 

We broke the descending trendline in December of 2009 on the 10 Year Treasury Note and now we are finally testing that trendline.  We are also closing a gap from 6 months ago.  At these yields, investors may start to rotate out of government-backed fixed income securities and back into risky assets.  A look at the $SPXEW is proof that zero technical damage has been done to the broad market.

Clearly there are concerns with international markets…. but please, take a look at the McClellan Oscillator and the Put/Call ratio – then tell me with a straight face we're not due for any kind of mean reversion. It looks like the money that went into gold is going to look for a new home while it consolidates.  Where do you think it's going to go? Ultra-bearish ETFs or buying equities on weakness to resume the cyclical bull?

Risk management is the name of the game.


Kick the bear

Could It Be This Easy?

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I'll start by saying that guest content has been very sparse lately, so this might be the only post for most of the day. That's fine, because after a week like we've had, you should probably rest up!

There are a couple of bromides that get tossed around in the world of trading that I've never liked. The first is something along the lines of: "The market wants to prove as many people wrong as possible." The second is: "If it's obvious, it's obviously wrong."

The first one is silly because it anthropomorphizes the market into this weird, sadistic beast that gets its jollies out of embarrassing people. That's just plain dumb. The market is made up of people (and, errr, lots of computers) all out to make a buck. Sometimes – – like most of the 1990s – – the market just climbs higher and higher, and the market is certainly not proving most people wrong. On the contrary, it's making most people really happy. I think this notion also sets one up psychologically for an adversarial attitude toward the market, which is often deleterious to one's trading.

The second one is one that bothers me as a technician, because in my lengthy experience as a chartist and a trader, I've often seen "obvious" patterns that did precisely what they were supposed to do. For me, even though on rare occasions I am faced with "losing my religion", I always come around to the same conclusion, which is that technical analysis works. Prayers delayed are not prayers denied, and although sometimes a pattern may fiddle around longer than you'd like, it will ultimately either work out of demonstrate, within a reasonable loss, that your premise is no longer valid.

Over the past several weeks, I made two very specific conjectures as to where the market would go, and both of them have been correct. The first one, back on April 26th, was very detailed and much more speculative, but it painted out, pretty much move for move, what was going to happen.

The second one, made after the "flash crash" on Thursday, May 6th, was much simpler and – there's that word again – obvious. I mean, anyone with even the most elementary experience with charts would recognizing a topping pattern, a retracement, and a subsequent fall. Too good to be true, right? Too easy? Well, that's what has happened so far.

0516-hs
Now I will be the first to say that, at current levels, it's higher-risk to be short than it was a day ago. When one has a horizontal line like the one above, it's the lowest risk/highest opportunity place to be, which is why I loaded up on shorts. I remain loaded up on shorts, even though the /ES could very well decide to push 40 points higher while still remaining under that important line. 40 points would be very painful, but on a chart by chart basis, I am comfortable with my positions. So I stay put.

At the moment, I have a large quantity of mostly small positions. I have 192 shorts, 7 ultrashorts, and 1 long. That long is GLD, and it's a big position. I am ambivalent about this one, to be honest, since gold's behavior (and its public saturation) is getting to be worrisome. However, in the event of an equity panic, experience has shown that gold has represented a flight to quality. In addition, in the face of triple-digit drops in the Dow, precious metals are just about the only things holding up.

I'll close by saying that many individual charts are being as "obvious" as indexes. Take Visa, for instance. The chart below is simply magnificent. V broke a major trendline, and then it gapped down after a nice topping pattern. When it pushed back higher, it closed the gap with one cent (!) to spare, and the very next day, it plunged nearly 10%. That is poetry in motion!

0515-v

My big picture is calling for a fall of nearly 25% from peak levels by the end of July. I'm really going out on a limb by even suggesting this, because a fall of 25% from the peak would obviously be earth-shaking. But the fact is that my big picture is still quite intact, and that's the next stage.

Have a good weekend.

Sentiment Scout (by George Rahal)

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Financial media and newspapers have been besieged by bearish overtones, speakers, images, etc. This is fair, given that a crash is scary, but I want to highlight one example that is particularly subtle and unique. To me, it exemplifies the underlying psychological layers of bearishness that have existed throughout most of the bull market. 

The image above, a snap-shot of the home page of MSN Money, highlights today's 400 point rise in the Dow. The chart, however, does not contain the typical green up arrow, but is designed in such a way as to provoke fear! Three qualities of the image create this effect: the most obvious is the color scheme, dark blue and red (for an up arrow!). The second is the curvature of the arrow as well as a thin line above it. They suggest the completion of this move is a roll over on the downside. The third is the perspective of the dark blue grid that serves as the background. Notice how the bottom of the grid is narrow and seems further away in perspective than the top. The effect created is of vertigo, as if the viewer is standing on the top of a building looking down. 

Fear and vertigo are the emotions that image was designed to produce from the viewer. Doubt and confusion will be side-effects because, blatantly, an up arrow and +400 seem like good things. Unconsciously, the viewer experiences turmoil from the conflicting messages.

The care the media is taking to foster fear (which sells) in its readers is no doubt a sign of structural bearishness that will continue to serve as a foundation for market strength.