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.

Psych Flux

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Among the body of the trading populous, there is surely a subset of folks that are bearish and wanted to short the devil out of the market once a huge bounce took place, and now they are furious with themselves for having missed the boat.

I'm not in this camp, but I'm certainly partly angry with myself for not being even more aggressive. This is effortless to say in retrospect, of course. Had the market been up 268 points instead of down the same amount, I would be upset with myself for very different reasons! As I've said many times – and will say many times more – traders are rarely happy.

I don't blame the folks that held back, though. I was mentioning "the bounce" repeatedly recently. Well, I think we got our bounce. When, you ask? Monday and Tuesday! Yep, that was the big bounce! Whoop-dee-freakin'-do! 

The psychology that has caused would-be bears to hold back………and caused your long-suffering narrator to not be as aggressive as he might have been………has easy-to-identify origins. Let's face it, for the past ten months:

+ Every dip was a buying opportunity;

+ The government clearly was not going to let equities fall;

+ Goldman Sachs wasn't going to let equities fall;

+ Short positions were good for one day; two days, tops;

+ Just like in the movies and on television, we all knew that things were going to work out fine in the end.

It is my contention that the reality has changed. My response to the above five points is:

– Rallies are now selling/shorting opportunities. The kind of event we saw on Monday/Tuesday is a gift to bears. I understand Cramer was jumping all over the place with excitement on Tuesday after the close. That makes sense, given the man's track record and the psychology of the market.

– The government has bigger fish to fry than the stock market. The doe-eyed optimism from just one short year ago is utterly gone, and I imagine Obama might be quite content to leave the office after one term, Lyndon Johnson style. It's going to be a job that nobody wants.

– If there is one homogeneous religion on Wall Street, it's the worship of money. Goldman cares about profits and profits only, and whether it's the short side or the long side, they're going to make profits happen.

– Closing out short positions after one or two good days can produce some quick and tidy profits, but meaningful profits require some patience – – and some tolerance for swings up and down. I've been sitting tight on my shorts, even though days like Monday and Tuesday make it a bit nerve-wracking.

The fifth bullet point – – about how everything is going to work out just fine – – is something that simply isn't true. The video-saturated public gets accustomed to Happy Endings, because that's how things are supposed to go. But think about the everyday people of Germany in 1935………..or American in 1860……..or Japan in 1940………or China in 1949. These were regular folks, not much different than you or me, just trying to provide for their families, live their lives, and get along. Do you really think the fact they didn't expect the horrors that awaited them around the corner made any difference? Of course not.

We are living in a slow-motion train wreck, and no one knows how the movie is going to end. I do believe, however, that even though no one on the planet knows if the environment we're going to find ourselves in is going to be (1) deflationary, or (2) inflationary, neither of those scenarios is going to produce a happy result. In other words, we know things are going to end badly. We just don't know which flavor of bad.

In the meantime, tomorrow is going to be much more interesting than your run-of-the-mill trading day. There is no reason at all the Dow won't move up 300 points. There also isn't any reason it won't move down 300 points. Irrespective of what it does tomorrow, I think a new general trend is in place, and I think everything changed starting on January 20th, no matter what the next few days holds.

Paging Doctor Freud

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I saw this fascinating photograph in yesterday's newspaper. The scene was of the president's top financial and economic advisors, flanking the President, who was discussing the 2011 federal budget.

Do these gentlemen seem posed in a way that suggests they are a little – – I dunno – – fearful? I have clustered them more tightly together than they were on the podium for the sake of space……….

0203-protect

The Continuation of – – – So Now What?

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Since the past couple of weeks have been pretty amazing, I reflected back a bit on what I was writing near the top. I still say, as I did back on the 20th, that I want some kind of medal or tiara or something if 1152 turns out to have been the ultimate top.

More importantly, I was doing a lot of hang-wringing on the very first day of the drop. Why? Because it's all about psychology at this point. What happens to bears when they've been beaten up for ten straight months? Well, they get a little skittish. So at the first sign of a profit – bam! – the temptation is to just take it and run for cover.

In spite of this temptation, I left well enough alone, and thank goodness for that. I had, at the top, posted a series of charts I thought would be interesting to short. I broke these symbols up into posts one, two, three, and four. Here, after a couple of weeks, are where those prices stand:

0130-picks 

So a couple of small duds, but mostly quite good, and a couple of really great winners. I show the above table to illustrate how quickly some issues can lose value. Remember, this is just over a span of nine trading days.

So now what – – well, being a generally worrisome fellow to begin with, my hand-wringing hasn't stopped. Indeed, with a fat plate of paper profits in front of me, it's more tempting than ever to run for the exit and wait for the bounce (which may or may not ever happen). But – as on the 20th – I must not allow myself to close out my positions based on nothing more than the prospect of a lift in the market.

Let me share one other thought in this very un-chart-y post. There was a phenomenon I experienced back in the wonderful days of late 2008 that went something like this: the trading day would start out, my positions would be doing very badly, but in the back of my mind I knew it was actually going to be a great day. And, sometimes slowly, sometimes quickly, things turned around, and by the closing bell, sure enough, things ended spectacularly.

I had forgotten what that felt like, but that peculiar effect has returned. And, as difficult as it is to describe, I have felt an eerie calmness lately on those mornings when it seemed like 'the bounce' was finally here, and all my short profits were at risk. It's happened several times lately, particularly yesterday. The morning started off with very deep losses, and I simply walked away from the screen for an hour (which for me is a lifetime), knowing things were going to be OK. And I closed January at the top of my equity curve.

The experienced traders out there know there is a fine line between quiet confident/discipline and cockiness. My tool to maintain this discipline is the tedious, boring, exhausting, but absolutely essential re-setting of stops across a bazillion positions – – sometimes on a daily basis. And that's all I've got to say about that.

The Snark that Marked the Top

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As much as I usually enjoy this blog, what I do here isn't easy. I manage money professionally, I manage a charting product, and I blog seven days a week. The vast majority of folks……. 99%+…..have been nothing but sweet and grateful about it. There are a handful of clods out there who are negatively obsessed with me and, for reasons I cannot fathom, make it their business to say nasty things about me. I'm confident Karma is going to take care of them in good time, because the good Lord knows my heart's in the right place.

One of them is reading this post right about now, and he's really, really hung-up on me – – he even watches my videos, and takes the time to tell the seven people that visit his blog about how stupid and inept I am. Mental instability can make people behave in ugly ways.

But one email in particular (from a different person) was especially nasty, and I received it at what apparently was almost the exact top of the market. Allow me to share this little gem:

0128-asshole

So this guy thinks Ford is going to 50, and he makes a bunch of snarky remarks, culminating in a prediction that I'm going to get ruined, along with those who have faith in me and my craft.

I cannot know the future, but I try my best. All I can say is, the email – one of the nastiest I've ever received – was an interesting turning point in the market.

0128-prescient =

So what's my point in all this? Simply that extremes in human emotion can be good indicators to market turns. I get very, very concerned when I'm feeling giddy about my own trading, because that means I'm in the danger zone, and if I'm wise, I probably will simply close my positions out and take a break. Likewise, if the snark level gets high – described as the S.A.D. Indicator within the Slocabulary – things are about to turn better for the bears.

Watch your emotions, and watch those of others. Self-awareness is an important element – perhaps the most important element – of trading success.

C-P3-O (by nummy)

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Preamble by Tim that has nothing to do with the post: Several folks have written to me saying that they cannot post comments anymore, or that their avatar has disappeared. Some have even asked if I've banned this (which is peculiar, since the people writing are as nice as can be). First off, my frequency of banning is Virtually Never; perhaps two or three people a year. Second, I think Disqus is having some database issues going on that are affecting some users. Please know that I'm as eager for you to comment as ever, and that I haven't done anything on this end to squish your avatar or its wonder-twin powers.  If you're having trouble, please write them at [email protected]

Many of us are excited about the ever-elusive P3 wave down that would confirm this rally as a bear market rally.  Is this it?  If this is the start of P3, things can get nasty pretty fast and bulls are toast.  It may very well be, but the contrarian to my contrarian is molesting me.  What if this isn't it?  What if in the bigger picture, we are at the foot of another bull run?  I investigate what could happen (and has happened) if we really are in a new bull market (which I highly doubt).

Katzo  

First of all, I want to thank katzo for mentioning before that topping processes can be tough to swing trade and several times he pointed to the 2004 example where SPX put in a nice triple top and then corrected in a negative channel.  He has also been making some sweet calls this week, so thanks katzo!

When we look back at a chart from 2003-2004 and compare it to 2009-2010, the similarities are pretty surprising.

+ The first major move up from the March 2003 lows (almost to the freaking day) was topped in early 2004.

+ The wave structures look fairly similar.

+ The ranges are fairly similar.  In 2004, we topped around 1150 (like now).  However, March 2003 lows were 800ish.

+ After that "local top", we had two sequential days with moves more than 2sigma (1sigma = a standard deviation) to the downside.  To give you an idea, a 2sigma event occurs approximately once every 44 (trading) days (~2 months).  The chances of getting 2 sequential 2sigma events are one in 1,936 (trading) days (~7.7 years).  If you'd like my standard-deviation TOS script, Download MyStdDevSTUDY.

-We arrive at a similar trendline in both cases.  In 2004 we broke it and wiggled around it before leaving its vicinity.  Today, we are very close to breaking the analogous trendline from 2003-2004.

0304comparison

So if P3 is bogus, we could see similar action to 2003-2004.  We have seen so much similarity so far, so why shouldn't it continue?

But when we face the situation of fundamentals, aka reality, I laugh at the ridiculousness of the contrarian to my contrarian because the economic situation today is nowhere near what it was in 2003-2004.  A correction is starting and a sideways-ish mildly negative-sloping channel correction is all the bulls can hope for if this isn't P3.