Whilst the market awaits the slew of data and news of the next week, trading seems to be slowing to a grind. The data releases start today with the first release of the US third quarter GDP, in light of the debate within the FOMC regarding QE, this could prove to have even greater significance than usual: At least in the minds of market participants, even though the first release will probably bear little or no resemblance to the final revision. - I am not going to get drawn on market direction today, as I think we face too many variables heading into next week.
I would instead like to comeback to my posting from last Friday on the issue of 'Trading Psychology and needing a Strategy'. As part of that post (which can be viewed here) I suggested that for many traders their flawed strategy or perhaps lack of strategy, was analogous to walking into a casino and playing roulette, a game where mathematically it is impossible to beat the house over the long-term. This actually caused quite a bit of debate with some friends and ex-colleagues who refused to accept that the house could not be beaten at roulette.
These are people who are extremely successful and highly intelligent (almost certainly more so than me) and yet they refuse to agree that the house can not be beaten. One argument that is put forward (by more than a few people) goes something like this: Assuming the payout is 35:1 and the chances of winning are 36:1 (European game), then lets say the numbers 1 and 2 both come up twice, each in four consecutive spins, then the odds of these two numbers coming up again is highly unlikely, thus the odds are now closer to 34:1 whilst the payout is still 35:1, thus shifting the odds in the favour of the player over the casino. This is a common misconception, even if in the example given, the number '1' came up for four times in a row, there is still as much chance of the ball dropping on the number '1' as any other number on the next spin. They also tend to quote examples of times when this has occurred to them, as proof of their argument.
The argument proposed here panders to one our own human biases. As humans we all like to think we are rational, however we are in fact often far from rational, for example if we own something we tend to believe it has more value or worth than if we do not own it. – It is these common biases and misconceptions in peoples thinking which drive markets and lead to traders making basic mistakes. By the way if we all did think rationally then the game of roulette would not exist nor most probably would markets, but life would also be a damn-sight less colourful. – I will cover biases another time in more detail, as understanding them is necessary in understanding markets and ourselves.
I am keeping today's posting brief, partly because I have am a touch jaded after one Guinness too many last night...
Before I go: - Something for the weekend. --- Something mellow in fact --- One of my favourite bands of all time singing one of my favourite songs of all time. The Kinks - Waterloo Sunset.
Friday 29 October 2010
Thursday 28 October 2010
Likely to remain volatile into next week. + US 10 Year + Is Greece hotting up again?
The US equity markets continues to behave in a volatile nature, this is not surprising given the weight of news and data over the next week. A QE story seems to hit the wires about every 5 minutes, it appears that opinion remains strongly divided both within the Fed and outside. My call is that Bernanke, being the sly old fox, will pander to both sides, perhaps not doing as much as the most extreme expectations, but none the less providing a strong boost, but within that also allowing flexibility for the future so that of he needs to hit it heavy and hard he can, or if he needs to ease back he can. - I do not expect the issue to actually be resolved fully next week, thus this will likely remain an on-going theme for the next several months, adding to increasingly volatile markets. I do not think much, direction wise, will be resolved until next week at least, but clearly the news will have the ability to slice a chunk off of the market, or give it an extra boost, which is why we are seeing increasingly volatile short-term action.
Moving on to US 10 Year yields. This is obviously a central theme in the on-going QE debate, since these are likely to be one of the main tools used by the Fed in the QE operations. However, an awful lot has been priced in on these, and in the past few weeks some of the froth has started to disappear from the 10 year t-note futures markets: Yields have seen a decent pick-up, rallying almost 40bps from the low 2.30s to the low 2.70s yesterday. I had been expecting this to move lower towards 2.00%, however whilst I do not rule this out for a later trade, short-term it looks like a low is in, and the risk of a rally towards the low 3 handles is a real possibility in the next few months. The first chart below shows US yields over the past couple of years.
The chart above shows how the yield has been forming a 'Falling Wedge' pattern in recent months, whilst momentum as measured by the 10 day RSI has been diverging upwards. The past couple of days has seen a breakout from the wedge, the yield may comeback to re-test the top of the wedge, but the risk is that it holds and moves higher. - The 10 Year t-note continuation future chart is also supporting these assertions. The top chart below shows this on a weekly basis. A couple of observations which I have highlighted:
The market is likely to see some rebound I think before and possibly around next week's news, however the move to higher yields could be a theme in the next few weeks. Will this affect stocks? I am not sure, historically these markets move inversely, however the relationship between these two has not been consistent in recent years. However, if stocks were to suffer a sharp drop, then it is likely that bonds rally and yields drop, thus if the above scenario above were to occur, it is likely it would happen against a steady or rallying stock market environment.
Finally with regard to Greece; there has been a lot of negative talk hitting the wires these past couple of days. One theme seems to be how, with economic conditions weaker than expected (not helped by the EURUSD recovery), tax revenue is coming up short of projections in parts of Europe, and as a result countries struggling with high deficits are now confronting the prospect that they will miss the budget deficit targets forced upon them this year. In the past couple of days things have started to stir in Greece whilst Ireland has had mounting issues in the past couple of weeks. The charts below show the 5 Year CDS for Greece and Ireland over the past 6 months, below that is a chart of the SP500 Index and the EURUSD. I have highlighted the two prior occasions when the 5 year CDS prices moved up sharply in the past 6 months, and how this saw sharp drops in the SP500 and the value of the EURUSD. In addition I have placed emphasis on the action of the past week. - If this whole Euro Sovereign Debt issue were to explode again, then the above analysis is likely to be wrong on the T-note, as US yields should drop as a safe-haven bet while equities would once again probably turn ugly.
Moving on to US 10 Year yields. This is obviously a central theme in the on-going QE debate, since these are likely to be one of the main tools used by the Fed in the QE operations. However, an awful lot has been priced in on these, and in the past few weeks some of the froth has started to disappear from the 10 year t-note futures markets: Yields have seen a decent pick-up, rallying almost 40bps from the low 2.30s to the low 2.70s yesterday. I had been expecting this to move lower towards 2.00%, however whilst I do not rule this out for a later trade, short-term it looks like a low is in, and the risk of a rally towards the low 3 handles is a real possibility in the next few months. The first chart below shows US yields over the past couple of years.
- Firstly the strong similarity between the recent price and momentum action and the price and momentum action at the interim top in early 2008, both highlighted within the mauve ellipses. Note the sharp correction led to an extended consolidation, after which the main rally re-asserted itself.
- Secondly the similarity between the bigger picture price action and the next chart below which shows Gold weekly 2006 - 2010, in particular the price behaviour as highlighted by the large red ellipses on both charts. On both occasions the breakout of these large patterns led to strong dynamic rallies. In the case of the Gold the rally eventually led to the Gold price being well overbought in late 2009. This saw a sharp correction followed by consolidation, eventually however the rally in Gold, as we know re-asserted itself.
The market is likely to see some rebound I think before and possibly around next week's news, however the move to higher yields could be a theme in the next few weeks. Will this affect stocks? I am not sure, historically these markets move inversely, however the relationship between these two has not been consistent in recent years. However, if stocks were to suffer a sharp drop, then it is likely that bonds rally and yields drop, thus if the above scenario above were to occur, it is likely it would happen against a steady or rallying stock market environment.
Finally with regard to Greece; there has been a lot of negative talk hitting the wires these past couple of days. One theme seems to be how, with economic conditions weaker than expected (not helped by the EURUSD recovery), tax revenue is coming up short of projections in parts of Europe, and as a result countries struggling with high deficits are now confronting the prospect that they will miss the budget deficit targets forced upon them this year. In the past couple of days things have started to stir in Greece whilst Ireland has had mounting issues in the past couple of weeks. The charts below show the 5 Year CDS for Greece and Ireland over the past 6 months, below that is a chart of the SP500 Index and the EURUSD. I have highlighted the two prior occasions when the 5 year CDS prices moved up sharply in the past 6 months, and how this saw sharp drops in the SP500 and the value of the EURUSD. In addition I have placed emphasis on the action of the past week. - If this whole Euro Sovereign Debt issue were to explode again, then the above analysis is likely to be wrong on the T-note, as US yields should drop as a safe-haven bet while equities would once again probably turn ugly.
Wednesday 27 October 2010
SP500 observation and USDJPY update.
The SP500 rally seems to have run out of steam for now. I think this is a corrective pause which could retrace further, I am thinking perhaps a dip to the low to mid 1160s on the e-minis, with perhaps an extension into the mid 1150s. I had expected some volatility and corrective price action ahead of the slew of news/data of the next couple of weeks, however I think the bigger bullish forces underlie this market for now and these should keep this from dropping too far. I also want to highlight a similarity between the current 'Price action and momentum' set-up, and the set-up in April/May 2007 (See chart below - Click chart to enlarge).
The next two charts below show close-up views of these two highlighted areas.
Note the strong similarity between the two set-ups, this does not of course guarantee we will see subsequent price action of a similar nature, however I do believe that price action of a similar nature may be a strong possibility.
USDJPY FX
The USDJPY put in its first decent correction in some time yesterday, this came after Monday's closing level was within a whisker of the historic low closed on the USDJPY. Looking at the weekly USDJPY chart (See below) this week's low (so far) has occurred right on a major support level going back almost 10 years. I intend to look a little more closely at this in the next couples of days.
Finally in reference to yesterday's posting on the EURJPY; the follow through on the 6 hourly candles 'Three Black Crows' was weak, however the upside has also remained in check thus far.
The next two charts below show close-up views of these two highlighted areas.
USDJPY FX
The USDJPY put in its first decent correction in some time yesterday, this came after Monday's closing level was within a whisker of the historic low closed on the USDJPY. Looking at the weekly USDJPY chart (See below) this week's low (so far) has occurred right on a major support level going back almost 10 years. I intend to look a little more closely at this in the next couples of days.
Finally in reference to yesterday's posting on the EURJPY; the follow through on the 6 hourly candles 'Three Black Crows' was weak, however the upside has also remained in check thus far.
Tuesday 26 October 2010
EURJPY FX
With markets likely to track time this week ahead of next week's slew of news. It is an opportunity to look at some other areas of interest within the wider markets. Today I will look at the EURJPY FX cross, as there may some interesting action occurring here.
The first chart is the multi-year weekly chart. Currently the major trend remains lower, however momentum is strongly divergent here; momentum as measured by the RSI and MACD on the recent 2010 low is well above the momentum levels recorded at the low of 2009. This does not mean a break-up through the declining trend-line or a trend change is due, direction is primary and momentum is secondary, however it is suggesting it is a reasonable possibility. In addition I want to emphasise the strong similarity between the price action and momentum developments over the past 2/3 years, and the period in the mid-1990s when this currency pair made a major low.
The weekly charts thus appears to offer some interesting possibilities. The daily chart below can add some further clues, though nothing decisive at this stage. The first thing to notice is the large Expanding/Broadening Triangle formed over the past five months. (See notes and illustration below regarding Broadening Formations - btw the example described refers to a broadening top but it is also valid as a broadening bottom, particularly in currencies where we are comparing two currencies, rather than an asset.)
John J.Murphy in his book 'Technical Analysis of the Financial Markets' (in my opinion - the Bible of Technical Analysis) shows a diagram of an idealised Broadening Formation. (See image above).Murphy goes on to say - "This situation represents a market that is out of control and unusually emotional. Because the pattern also represents an unusual amount of public participation, it most often occurs at major market tops (Bottoms). The expanding pattern, therefore, is usually a bearish(bullish) formation" . With regard to volume during the formation of the pattern Murphy says -“The volume pattern also differs in this formation. In other triangular patterns, volume tends to diminish as the price swings tend to grow narrower. Just the opposite happens in the broadening formation. The volume tends to expand with the wider price swings.”
Coming back to the EURJPY we thus have a weekly set-up where the downside is still in charge, but strong corrective influences are at work. And a daily chart showing a strong reversal pattern, however within this pattern is still the possibility of one more dip lower, and/or the possibility, as with all patterns, that the patterns does not actually work. I would also like to add that the price is pushing against the downtrend, which adds some tension to the situation, a continued rejection of the downtrend would favour the dip lower scenario, whilst a sustained break of the downtrend, would be a signal that further strong gains may be in the pipeline.
Finally, the short-term chart also has an interesting little pattern. I show this on the 6-hour candle chart below. The pattern is a Sideways/Declining 'Expanding Wedge' , these can produce quite explosive upside moves. I do have some reservations about this particular example though; the slope of the upper line is more pronounced than I like to see in these patterns, typically I like the upper line to be close to horizontal or at least a gentle downward slope, however the proximity of the major downtrend line may be influencing this. I would also like to add that the trading signal to go long on a break of this pattern would be a move over 113.94 the last high in this pattern (however, it is worth bearing in mind that the major downtrend line intersects aroind 114.50), with a stop placed dependent on other factors. I would not suggest going long unless 113.94/114.00 occurs, particularly as very short-term, yesterday's price action produced a bearish '3 Black Crows' pattern, which may produce downside follow though in the next couple of days.
One final thing with regard to this trade. A look back at the weekly chart suggests to me that if the down-trend line is broken, then the upside potential could be very large and relatively rapid. This suggests to me a very good risk/reward trade. If the break-up were to occur without the low of the past 24 hours being broken, then we are talking about a long instigated at 114 with a stop at 112.40, and potential upside target of 140.00. The risk would be 160 points, the potential reward 2600 points = Risk reward ratio 16.25:1. And no carry cost.
The first chart is the multi-year weekly chart. Currently the major trend remains lower, however momentum is strongly divergent here; momentum as measured by the RSI and MACD on the recent 2010 low is well above the momentum levels recorded at the low of 2009. This does not mean a break-up through the declining trend-line or a trend change is due, direction is primary and momentum is secondary, however it is suggesting it is a reasonable possibility. In addition I want to emphasise the strong similarity between the price action and momentum developments over the past 2/3 years, and the period in the mid-1990s when this currency pair made a major low.
The weekly charts thus appears to offer some interesting possibilities. The daily chart below can add some further clues, though nothing decisive at this stage. The first thing to notice is the large Expanding/Broadening Triangle formed over the past five months. (See notes and illustration below regarding Broadening Formations - btw the example described refers to a broadening top but it is also valid as a broadening bottom, particularly in currencies where we are comparing two currencies, rather than an asset.)
John J.Murphy in his book 'Technical Analysis of the Financial Markets' (in my opinion - the Bible of Technical Analysis) shows a diagram of an idealised Broadening Formation. (See image above).Murphy goes on to say - "This situation represents a market that is out of control and unusually emotional. Because the pattern also represents an unusual amount of public participation, it most often occurs at major market tops (Bottoms). The expanding pattern, therefore, is usually a bearish(bullish) formation" . With regard to volume during the formation of the pattern Murphy says -“The volume pattern also differs in this formation. In other triangular patterns, volume tends to diminish as the price swings tend to grow narrower. Just the opposite happens in the broadening formation. The volume tends to expand with the wider price swings.”
Coming back to the EURJPY we thus have a weekly set-up where the downside is still in charge, but strong corrective influences are at work. And a daily chart showing a strong reversal pattern, however within this pattern is still the possibility of one more dip lower, and/or the possibility, as with all patterns, that the patterns does not actually work. I would also like to add that the price is pushing against the downtrend, which adds some tension to the situation, a continued rejection of the downtrend would favour the dip lower scenario, whilst a sustained break of the downtrend, would be a signal that further strong gains may be in the pipeline.
Finally, the short-term chart also has an interesting little pattern. I show this on the 6-hour candle chart below. The pattern is a Sideways/Declining 'Expanding Wedge' , these can produce quite explosive upside moves. I do have some reservations about this particular example though; the slope of the upper line is more pronounced than I like to see in these patterns, typically I like the upper line to be close to horizontal or at least a gentle downward slope, however the proximity of the major downtrend line may be influencing this. I would also like to add that the trading signal to go long on a break of this pattern would be a move over 113.94 the last high in this pattern (however, it is worth bearing in mind that the major downtrend line intersects aroind 114.50), with a stop placed dependent on other factors. I would not suggest going long unless 113.94/114.00 occurs, particularly as very short-term, yesterday's price action produced a bearish '3 Black Crows' pattern, which may produce downside follow though in the next couple of days.
One final thing with regard to this trade. A look back at the weekly chart suggests to me that if the down-trend line is broken, then the upside potential could be very large and relatively rapid. This suggests to me a very good risk/reward trade. If the break-up were to occur without the low of the past 24 hours being broken, then we are talking about a long instigated at 114 with a stop at 112.40, and potential upside target of 140.00. The risk would be 160 points, the potential reward 2600 points = Risk reward ratio 16.25:1. And no carry cost.
Monday 25 October 2010
Strong gains this morning, but I think further volitility nay ensue.
Markets have soared this morning, the catalysts appear to be a rather benign response at the G20 to USD weakness, plus a Goldman's article suggesting QE2 may be much larger than some think. Despite this early rally, I can't help thinking we are likely to see some more volatile and messy action this week, we have a heavy data week this week, then next week we face a landslide of major events, including US Mid-Terms, the FOMC meeting plus the QE2 announcement, and as a side show more economic data including the US payrolls.
With so much facing the markets, despite this morning's strong move, the remainder of the week could be volatile. This should continue to provide short-term trading opportunities for scalpers and intraday traders, as per last week. - Bigger picture the major trend on the SP500 since early September remains on track, however momentum is showing some signs of waning and turning a touch, though at this stage this is secondary to the bigger trend.
The chart below shows the EURUSD, I have highlighted some price action which I believe suggests, that we may see an extended period of consolidation in the EURUSD, even though short-term further gains are possibly likely in the wake of this morning's news.With the rallies in the EURUSD and the SP500 since early September having been pretty well co-ordinated, any consolidation/corrective EURUSD activity could see a similar price action in the SP500 .
My old risk barometer AUDJPY still gives me cause for concern on risk. Whilst this is not a clear signal, it is another factor to keep an eye on (See chart below). Essentially the rally in the SP500 has not been supported by the AUDJPY since mid-Sept. Whilst this is no doubt down to expectations of QE2, this has a strong correlation going back to 2003, see my article on this posted last week, (Can be seen by clicking here).
Overall a strong up day on stocks and weak USD will likely be the theme for the day, however I think markets will remain cautious and patchy this week, I do not think we will see clarity until at least the early November events are out of the way.
With so much facing the markets, despite this morning's strong move, the remainder of the week could be volatile. This should continue to provide short-term trading opportunities for scalpers and intraday traders, as per last week. - Bigger picture the major trend on the SP500 since early September remains on track, however momentum is showing some signs of waning and turning a touch, though at this stage this is secondary to the bigger trend.
The chart below shows the EURUSD, I have highlighted some price action which I believe suggests, that we may see an extended period of consolidation in the EURUSD, even though short-term further gains are possibly likely in the wake of this morning's news.With the rallies in the EURUSD and the SP500 since early September having been pretty well co-ordinated, any consolidation/corrective EURUSD activity could see a similar price action in the SP500 .
My old risk barometer AUDJPY still gives me cause for concern on risk. Whilst this is not a clear signal, it is another factor to keep an eye on (See chart below). Essentially the rally in the SP500 has not been supported by the AUDJPY since mid-Sept. Whilst this is no doubt down to expectations of QE2, this has a strong correlation going back to 2003, see my article on this posted last week, (Can be seen by clicking here).
Overall a strong up day on stocks and weak USD will likely be the theme for the day, however I think markets will remain cautious and patchy this week, I do not think we will see clarity until at least the early November events are out of the way.
Friday 22 October 2010
Uncertainty across markets. + Trading Psychology: Needing a strategy + Ali.
Markets have been highly volatile this week. The SP500 has had a 30 point range centred around 1175, the EURUSD has ranged from 1.3700 to 1.4050; wide ranges and no direction are prevalent across many markets this week. The upcoming G20 meeting this weekend, the more crucial Nov FOMC, where all should be revealed regarding further Fed action, and the backdrop of major industrial action and violence in France are all serving to make conditions extremely uncertain. I will not dwell on markets any further for now as I think it is best to stay out for now and see how things pan out. Instead I would like to talk about Trading Psychology.
A couple of weeks ago I blogged an article titled 'Mastering psychological and emotional aspects is critical in trading'. Today's post will look at why a defined strategy and careful application of that strategy is so vital to gaining an edge and be successful.
I am going to use a couple of analogies to help illustrate the point: Think of a trader's approach to the markets as a person walking into a casino (the analogy is not being stretched that far). The casino has two tables, one offering roulette, and one offering blackjack, the trader does not make a conscious decision to go to a table, however he makes a subconscious decision. Lets say half the traders move to the roulette table and other half the blackjack table.
Roulette : A game that it is impossible to win in a casino if continually played: The odds of winning when the ball drops on a single number are 37:1; the payout is 35:1. In fact whichever strategy one chooses; red or black, odd or even, etc, the payout is always marginally lower than the odds of winning.
So why do people play it ? Well a win of 35 times the stake sound very nice, when not weighed against the risk. It makes people feel good; furthermore people fool themselves into thinking they are actually very good at this, or that they have some sort of control over it, in other words it satiates their egos. Another explanation is that people are not actually tracking their losses and gains, over time they will forget or ignore their losses and focus only on the times they won, and when they do lose they are usually convinced that they will win next time. In addition many of them will be satisfied since they enjoyed the buzz of being around the roulette table and in the frenetic exciting world of the casino. There is even a certain machismo chest-thumping pride amongst some people when they lose big. – however and whatever the circumstances, in the long run continual playing of roulette provides guaranteed losses for players.
Now consider Blackjack. – The odds of winning in Blackjack are also stacked against the player. It is hard to define the true odds of winning on Blackjack; there are so many permutations both within a standard game and given the number of rule variations, however the odds are slightly tipped in favour of the house. But there are ways; lets call them strategies, whereby the player can tip the odds ever so slightly in his favour. It is known as card counting; it is not an easy thing to do, not easy at all, however with practice, plus discipline and patience, it can be done. Thus if done well; a player can successfully tip the odds slightly in their favour, giving them that crucial ‘edge’. This is the game that the many traders, including the successful ones try and play; in reality only very few are actually able to carry off the art of card counting, however those that are able to succeed at it will be the winners, it is they who equate to the 5 - 10% of people who enter trading who are able to make a success of it.
(For a really good read on blackjack and card-counting I highly recommend 'Bringing Down the House: The Inside Story of Six MIT Students Who Took Vegas for Millions' by Ben Mezrich , which I referred to previously in my earlier piece 'My top 10 Trading related books'.
Before, I leave this I want to show one further example of how strategy, and correct implementation of that strategy, can turn the odds in ones favour. The example is from the world of sport, and probably the most famous boxing match of all time; 'The Rumble in the Jungle' between Muhammed Ali and George Foreman in Zaire 1974. I was ten at the time and remember it well as it was all anyone was talking about. The question at the time was not if Foreman would beat Ali, but in what round.
Ali was 32-years old and considered to be past his prime. He had lost 2 of his past 14 fights, these were against Joe Frazier and Ken Norton, though he ultimately beat them both in rematches. Meanwhile the 24-year old George Foreman was at the top of his game, having knocked out both Frazier and Norton, each in two rounds. Foreman was considered an awesome, dangerous boxer his record was 40 wins in 40 fights, and even now his punch is considered the greatest punch in boxing history by many. He was considered unstoppable by most commentators and experts at the time.
However, Ali had a strategy, the strategy was clearly thought out and practiced in training, it also involved pre-fight strategy implementation, including the following steps:-
Ali charmed the people of Zaire in the build-up to the fight, thus ensuring that as he entered the ring it would appear to be as if he was fighting on home ground.
In preparation for the fight Ali's training was honed almost to perfection. One particular story highlights this: After every sparring session Ali would ask the guys he sparred with how they thought he was doing, the sparring partners would be courteous to Ali, telling him that he was fast and powerful and that he would overcome Foreman. However after one session with a new partner Ali asked him the same question, he replied 'Foremans going to flatten you!, hes too big and too strong, you're just not powerful enough to defeat him'. Whilst there was an outcry from Ali's coaches and trainers, ordering them to get this man out the room, Ali told everyone to be quiet and said 'double his salary, he stays until he tells me how I'm going to beat George'.
Psychologically he taunted Foreman both before the fight and during the fight, he also played a feint coming flying out of his corner at the start of the fight and launching into Foreman with a string of punches, suggesting to Foreman that this would be Ali's strategy, a strategy which would have played right into Foreman's hands. Foreman had already heard that Ali was planning to fight from the ropes and try and absorb his punches, but this totally threw him.
In the actual fight itself Ali implemented a strategy he termed 'Rope-a-dope'. After the first round assault Foreman came out of his corner in the second round expecting a toe-to-toe battle. Instead, Ali leaned back against the ropes and let Foreman flail away at him. The taunting of Foreman continued, this encouraged Foreman to come at him, Ali however would lean back, only protecting his face. This made Foreman angry and later frustrated, as he gave his best shots to Ali's midsection. But the give in the ropes was sufficient to reduce the damage (It was rumoured that Ali's manager had loosened the ropes, though this was never proved). When Foreman did throw a punch at his face, Ali was able to lean back or move his head just enough that the blow missed or had little impact. This was a special skill Ali had through most of his career. He would often hit an opponent while pulling back to avoid a counter-punch. At one point in the fourth round as Ali was leaning back, Foreman pummelled him with a massive left hook into the side, the punch took so much energy that it actually drained Foreman more than it did damage to Ali. Although Ali primarily used the rope-a-dope technique, he occasionally counter-attacked with fast, crisp blows to Foreman's face. Then he would slip back into the defensive mode. In this way, he was controlling the pace of the fight, according to his liking.
By the seventh round, Foreman had essentially punched himself out. His arms were tired and sometimes hanging on his side. Ali then used his speed and energy to do damage to Foreman, who was just trying to get in one good punch for a knockout. Ali taunted Foreman by saying, "George, it that all you've got?" Foreman realized that it was all he had.
In the eighth round, Muhammad Ali knocked out George Foreman to regain the World Heavyweight Championship. This was a complete shock, no one had seen this coming, but Ali had shown how a carefully thought out and implemented strategy could shift odds, even when everything seems so heavily stacked against you. As for Foreman, he was so devastated by the defeat, that he was never again the same fighter. (Though years later he did produce a mean grilling machine!!!!).
The point of all this is to emphasise the importance of a well thought out and implemented strategy. If one wants to be successful in trading they need a strategy like a blackjack card-counter in the casino, if they want that strategy to be successful they need to implement it with planning, precision, discipline and self-awareness, in the same way Ali implemented his strategy versus Foreman.
On that note, something for the weekend : It could only ever be one thing really, the eighth round from the 'Rumble in the Jungle', as my personal ultimate sporting hero Ali defeats Foreman. I suggest this is played with the volume up as the commentary is superb.
I also suggest you also watch this superb you tube clip from a serious of famous interviews from the 1970s between British TV interviewer Michael Parkinson and Muhammed Ali: It defines the man perfectly.
Have a great weekend.
A couple of weeks ago I blogged an article titled 'Mastering psychological and emotional aspects is critical in trading'. Today's post will look at why a defined strategy and careful application of that strategy is so vital to gaining an edge and be successful.
I am going to use a couple of analogies to help illustrate the point: Think of a trader's approach to the markets as a person walking into a casino (the analogy is not being stretched that far). The casino has two tables, one offering roulette, and one offering blackjack, the trader does not make a conscious decision to go to a table, however he makes a subconscious decision. Lets say half the traders move to the roulette table and other half the blackjack table.
Roulette : A game that it is impossible to win in a casino if continually played: The odds of winning when the ball drops on a single number are 37:1; the payout is 35:1. In fact whichever strategy one chooses; red or black, odd or even, etc, the payout is always marginally lower than the odds of winning.So why do people play it ? Well a win of 35 times the stake sound very nice, when not weighed against the risk. It makes people feel good; furthermore people fool themselves into thinking they are actually very good at this, or that they have some sort of control over it, in other words it satiates their egos. Another explanation is that people are not actually tracking their losses and gains, over time they will forget or ignore their losses and focus only on the times they won, and when they do lose they are usually convinced that they will win next time. In addition many of them will be satisfied since they enjoyed the buzz of being around the roulette table and in the frenetic exciting world of the casino. There is even a certain machismo chest-thumping pride amongst some people when they lose big. – however and whatever the circumstances, in the long run continual playing of roulette provides guaranteed losses for players.
(For a really good read on blackjack and card-counting I highly recommend 'Bringing Down the House: The Inside Story of Six MIT Students Who Took Vegas for Millions' by Ben Mezrich , which I referred to previously in my earlier piece 'My top 10 Trading related books'.
Before, I leave this I want to show one further example of how strategy, and correct implementation of that strategy, can turn the odds in ones favour. The example is from the world of sport, and probably the most famous boxing match of all time; 'The Rumble in the Jungle' between Muhammed Ali and George Foreman in Zaire 1974. I was ten at the time and remember it well as it was all anyone was talking about. The question at the time was not if Foreman would beat Ali, but in what round.
Ali was 32-years old and considered to be past his prime. He had lost 2 of his past 14 fights, these were against Joe Frazier and Ken Norton, though he ultimately beat them both in rematches. Meanwhile the 24-year old George Foreman was at the top of his game, having knocked out both Frazier and Norton, each in two rounds. Foreman was considered an awesome, dangerous boxer his record was 40 wins in 40 fights, and even now his punch is considered the greatest punch in boxing history by many. He was considered unstoppable by most commentators and experts at the time.
However, Ali had a strategy, the strategy was clearly thought out and practiced in training, it also involved pre-fight strategy implementation, including the following steps:-
Ali charmed the people of Zaire in the build-up to the fight, thus ensuring that as he entered the ring it would appear to be as if he was fighting on home ground.
In preparation for the fight Ali's training was honed almost to perfection. One particular story highlights this: After every sparring session Ali would ask the guys he sparred with how they thought he was doing, the sparring partners would be courteous to Ali, telling him that he was fast and powerful and that he would overcome Foreman. However after one session with a new partner Ali asked him the same question, he replied 'Foremans going to flatten you!, hes too big and too strong, you're just not powerful enough to defeat him'. Whilst there was an outcry from Ali's coaches and trainers, ordering them to get this man out the room, Ali told everyone to be quiet and said 'double his salary, he stays until he tells me how I'm going to beat George'.
Psychologically he taunted Foreman both before the fight and during the fight, he also played a feint coming flying out of his corner at the start of the fight and launching into Foreman with a string of punches, suggesting to Foreman that this would be Ali's strategy, a strategy which would have played right into Foreman's hands. Foreman had already heard that Ali was planning to fight from the ropes and try and absorb his punches, but this totally threw him.
In the actual fight itself Ali implemented a strategy he termed 'Rope-a-dope'. After the first round assault Foreman came out of his corner in the second round expecting a toe-to-toe battle. Instead, Ali leaned back against the ropes and let Foreman flail away at him. The taunting of Foreman continued, this encouraged Foreman to come at him, Ali however would lean back, only protecting his face. This made Foreman angry and later frustrated, as he gave his best shots to Ali's midsection. But the give in the ropes was sufficient to reduce the damage (It was rumoured that Ali's manager had loosened the ropes, though this was never proved). When Foreman did throw a punch at his face, Ali was able to lean back or move his head just enough that the blow missed or had little impact. This was a special skill Ali had through most of his career. He would often hit an opponent while pulling back to avoid a counter-punch. At one point in the fourth round as Ali was leaning back, Foreman pummelled him with a massive left hook into the side, the punch took so much energy that it actually drained Foreman more than it did damage to Ali. Although Ali primarily used the rope-a-dope technique, he occasionally counter-attacked with fast, crisp blows to Foreman's face. Then he would slip back into the defensive mode. In this way, he was controlling the pace of the fight, according to his liking.
By the seventh round, Foreman had essentially punched himself out. His arms were tired and sometimes hanging on his side. Ali then used his speed and energy to do damage to Foreman, who was just trying to get in one good punch for a knockout. Ali taunted Foreman by saying, "George, it that all you've got?" Foreman realized that it was all he had.
The point of all this is to emphasise the importance of a well thought out and implemented strategy. If one wants to be successful in trading they need a strategy like a blackjack card-counter in the casino, if they want that strategy to be successful they need to implement it with planning, precision, discipline and self-awareness, in the same way Ali implemented his strategy versus Foreman.
On that note, something for the weekend : It could only ever be one thing really, the eighth round from the 'Rumble in the Jungle', as my personal ultimate sporting hero Ali defeats Foreman. I suggest this is played with the volume up as the commentary is superb.
I also suggest you also watch this superb you tube clip from a serious of famous interviews from the 1970s between British TV interviewer Michael Parkinson and Muhammed Ali: It defines the man perfectly.
Have a great weekend.
Thursday 21 October 2010
Poor correction attempt on SP500 should help the bullish cause. + EURUSD update.
I had what historically was a very bearish 2 day-candle pattern on the SP500 over Monday and Tuesday which I highlighted in yesterday's post.. However this failed to follow through and was totally annulled with yesterday's rally. This suggests to me that the market is not ready yet for a correction, and that the bulls and buy-dip traders continue to hold the upper hand over the bears and sell-rally traders; thus favouring further upside for now.
EURUSD FX
EURUSD has rebounded nicely over the past 24 hours, and I see at least a re-attempt at last weeks high at 1.4140. I am looking at two short-term patterns driving this right now. The first chart below shows a Failed Head + Shoulder pattern, it was probably always doubtful that this was a valid Head + Shoulder pattern given the weakness of the Right Shoulder relative to the Left Shoulder. Failed H+S patterns often return to the top of the head as a minimum. The second chart shows a Falling Wedge pattern, I have previously discussed Falling Wedges and have identified four different types of Falling Wedge patterns (See illustration below). The current Falling Wedge confirms ideally to a Type 1 'Falling Wedge', suggesting strong short-term bullish potential. - Of course bigger picture considerations take precedent over the shorter-term patterns, and the high of last weeks two bearish candles at1.4122 and 1.4158 will act as strong overhead resistance. However, a clear break over this resistance should favour a move in accordance with my my views expressed last week in this post here. --- One final point, the G20 finance ministers and central bank governors meet this weekend, I would be surprised to see last weeks highs taken out ahead of this event, and the potential for further volatility remain highs particularly as this could see some feisty headlines.
EURUSD FX
EURUSD has rebounded nicely over the past 24 hours, and I see at least a re-attempt at last weeks high at 1.4140. I am looking at two short-term patterns driving this right now. The first chart below shows a Failed Head + Shoulder pattern, it was probably always doubtful that this was a valid Head + Shoulder pattern given the weakness of the Right Shoulder relative to the Left Shoulder. Failed H+S patterns often return to the top of the head as a minimum. The second chart shows a Falling Wedge pattern, I have previously discussed Falling Wedges and have identified four different types of Falling Wedge patterns (See illustration below). The current Falling Wedge confirms ideally to a Type 1 'Falling Wedge', suggesting strong short-term bullish potential. - Of course bigger picture considerations take precedent over the shorter-term patterns, and the high of last weeks two bearish candles at1.4122 and 1.4158 will act as strong overhead resistance. However, a clear break over this resistance should favour a move in accordance with my my views expressed last week in this post here. --- One final point, the G20 finance ministers and central bank governors meet this weekend, I would be surprised to see last weeks highs taken out ahead of this event, and the potential for further volatility remain highs particularly as this could see some feisty headlines.
Wednesday 20 October 2010
SP500 produces a very rare bearish candle pattern.
Afternoon Update.
SP500 is currently trading back up at 1177 in the wake of a Medley report which suggests that QE2 will be 'very material' as it expects FOMC to vote in Nov to buy $500b Treasuries over 3-6 months but to give an open-ended commitment to buy more over the following 12-18 mos depending on economic conditions. The report reportedly says that QE2 in this way could be bigger than the market expects and last longer.
________________________________________________________________________________
Early morning post
The price action on the SP500 has produced a very rare bearish pattern known as a 'Separating Lines'. This sees a strong light-bodied candle on day 1, and a strong dark-bodied candle on day 2, both opening at or very close to the same level. The chart below shows this, with an illustration and description of the 'Separating Pattern' below that.
As I have said these are very rare patterns, and typically there is further bearish follow through. As with all patterns there are no guarantees, and any sustained move over the open/high of yesterday may suggests a pattern failure, this of course makes this a relatively cheap risk/reward shorting opportunity.
Further to this, I have looked back over the period since 2000 to see how often these patterns have appeared. I have included 'Kicking' patterns too, as these are the bigger brother of 'Separating Lines', the main difference is that 'Kicking' patterns have a gap between the two days opening levels. There have only been two prior examples of these types of formations since 2000, occurring in 2000 and 2001. I have shown zoomed-in charts of both of these below (with an illustration of a 'Kicking' pattern.
Just to provide some balance, I would like to point out that the SP500 futures have remained within their rising short-term trend channel. I have highlighted this on the the chart below, which shows the SP500 e-minis on a 4-hourly basis. Though the accelerated move in the wake of the NFP number has been broken, the main channel is still intact. However any sustained break of yesterday's lows would support the view that a bigger bearish correction may be on the cards.
___________________________________________________________________________________Tuesday 19 October 2010
SP500 V the AUDJPY
An ex-colleague asked me yesterday why I have not committed to the short-side of the market considering my recent bearish posts, I responded by showing him that I have also had a number of bullish posts and arguments too, and that I considered both have their merits right now even if I do not trust the upside. He countered with his claim that the upside just did not make any sense in his book as it was totally irrational. -- He walked straight into that one really; -- cue John Maynard Keynes famous quote: 'Markets can stay irrational longer than you can remain solvent'. - He politely backed down.....
Today's post is going to look at the relationship of the SP500 and the AUDJPY fx cross. The AUDJPY fx cross has been one of my favourite barometers of risk appetite, its moves have been very closely correlated with moves in broader US equities for some time now. The first chart shows this close correlation has existed since around 2003 now. There have been some periods of directional divergence though these have been few and far between, the most obvious being H1 2008, though this eventually came back into line.
Over the course of this year the directional (not magnitude) correlation has remained strong. This can be seen on the daily chart below. However over the past two weeks there has been a strong divergence between the two. The AUDJPY has remained very benign lately moving in a tight sideways band, meantime the SP500 has gone from strength to strength. I assume that what is happening is an adjustment due to expectations of QE2, however if this is not the case, then should the AUDJPY fail to break out sharply to the upside soon, then perhaps the SP500 may realign itself with a sharp correction (one to watch I suppose).
The next chart shows the AUDJPY on its own with the MACD over the past year. I have highlighted the current sideways consolidation and the 2 prior similar consolidations from this year, together with their MACD indicators. There is no guarantee that just because we have 2 previous similar patterns, that a third similar pattern will produce the same result, however I think it is worthy of consideration. Note; the strongest similarity is with April this year. - I would point out that there is no hard and fast rule as to which way these sideways correlation typically breakout (absent of a an extended prior trend), or how long they can last.
I do not have any sort of recommendation based on the above, but I do think it is something else to keep an eye on in trying to gain an understanding of the bigger underlying picture.
Today's post is going to look at the relationship of the SP500 and the AUDJPY fx cross. The AUDJPY fx cross has been one of my favourite barometers of risk appetite, its moves have been very closely correlated with moves in broader US equities for some time now. The first chart shows this close correlation has existed since around 2003 now. There have been some periods of directional divergence though these have been few and far between, the most obvious being H1 2008, though this eventually came back into line.
The next chart shows the AUDJPY on its own with the MACD over the past year. I have highlighted the current sideways consolidation and the 2 prior similar consolidations from this year, together with their MACD indicators. There is no guarantee that just because we have 2 previous similar patterns, that a third similar pattern will produce the same result, however I think it is worthy of consideration. Note; the strongest similarity is with April this year. - I would point out that there is no hard and fast rule as to which way these sideways correlation typically breakout (absent of a an extended prior trend), or how long they can last.
I do not have any sort of recommendation based on the above, but I do think it is something else to keep an eye on in trying to gain an understanding of the bigger underlying picture.
Sunday 17 October 2010
The Bank Index and Housing Index, worrying signals. + 'Sub-Prime 2' ?? + Quick EURUSD comment.
My posting on Friday and my posting today will be totally contradictory. Friday's posting showed a reason to be bullish on the back of a comparison of the SP500 in the mid 1970s versus the past year. This has been a part of the backdrop for the year and has been one reason (amongst other technical reasons, holding me back from getting my bearish hat on since we based in the summer). However, there have been a number of reasons I have failed to join the bull trade, despite reference to various bullish scenarios I have made, which is that I just see too many conflicting signals and this keeps me wary of the the bull run.
My post today will focus on what is going on with financials and housing. In recent weeks I have made various references to how the financial sector continues to lag this market. Using the Phili Bank Index as a proxy for the financial sector, at times the financial sector has threatened to move up, but every times it tries it gets shunted back down again. This week the SP500 once again moved higher, however the Bank Index yet again failed to follow suit and ended the week having endured a torrid time. On Wednesday morning the Bank Index made a small break up through resistance on the open only to completely reverse and by Friday's close had lost around 7% from Wednesday's high. This can be seen on the chart below showing the SPDR Bank Index ETF.
What worries me is that the financial crisis of the 2007/2008 saw a big divergence between the broader indices and the Bank Index through 2007 prior to the collapse in 2008. The top chart shows this below, the second chart shows how we are once again seeing a strong divergence.
The next pair of charts show the Phili Housing Index (an index of 27 stocks representative of the housing sector) and the SP500 over the past 5 years. Note how strongly these diverged through 2006 and 2007, then eventually in 2008 the housing index and the broader market started to move in unison, during 2009 both markets recovered then fell away in summer 2010, however rather like banking stocks the direction of the housing index and the broader market has diverged over the summer and fall.
Finally and linked in to the above I want to draw attention to this weekend's John Mauldin letter. I have been reading his letters for a few years now, he makes these available on free subscription basis (click here to open his home page where you can subscribe). Mauldin has been a brilliant commentator of the financial markets, and I believe a read of his weekly letters is a must for anyone who wants to understand the fundamental backdrop to the big issues facing markets. - This week's letter is titled 'The Sub-Prime Debacle: Act 2', the title says it all, I don't need to elaborate any further, however I do suggest reading it in its entirety (it can be seen clicking here). Mauldin first really started focusing on the Housing Market as a major potential worry in the second half of 2006 and became more focused on Sub-Prime through 2007. I am posting a link here to one exceptional article he wrote in August 2006, which not only highlighted concerns about the housing market, but talked about about how a series of small shocks can weaken the underlying structure of a market leading to the sort of instability which makes a 'Crash' possible. In light of events through 2008, I really think this article was somewhat prophetic in nature.
There have been many analogies with regard to events throughout the 2007 - 2008 financial crisis, personally I prefer the analogy of a Tsunami, a substantial earthquake takes place thousands of miles away in the ocean (Sub-Prime) a wave races out in all directions, as it gets closer to the coast it grows larger, still those close to the coast have no idea it is approaching, then seemingly from nowhere utter devastation, often out of all proportion to the original trigger event. The thing with Tsunamis is they usually consist of many waves, not just one wave, this is often referred to as the tsunami wave train. The amount of time between successive waves, known as the wave period, is sometimes only a few minutes, in other instances waves are over an hour apart. Many people have lost their lives after returning home in between the waves of a tsunami, thinking that the waves had stopped coming. - I can not help thinking the waves of the Sub-Prime Tsunami have yet to have fully passed by, perhaps if Mauldin is correct, then Sub-Prime Act 2 is the next wave.
Perhaps the early indications are starting to show in the behaviour of the divergence between financials and the broader indexes. I am not sure the market is yet ready to succumb to the next wave, however the fingers of instability remain, and new ones appear to be emerging. It is possible the SP500 has one final spurt, helped by the impending arrival of QE2 and a stated change to the Feds Inflation target, which could see a move back to the highs of April 2010 or perhaps a touch higher (the 2007 divergence of financials and the broader index happened as the SP500 made a slight new all-time high) or perhaps it could succumb sooner. - One technical analysts I follow is 'Humble Student', he believes we are very close to the next tsunami wave. I have come to respect his calls after following him for a while, he provides lots of alternative technical analysis methodologies and nailed almost to the minute the 'Flash Crash', and the low and rally in late August/early Sept (thus in my opinion enabling him to avoid the moniker easily attached to so many Tech-Analysts of 'Perma-bear'). His timing has not been perfect thus far on this call, however if something so big and significant is about to hit either soon or after a small delay, then exactness on timing is probably not the most critical issue here.
EURUSD
Friday saw a sharp turnaround in the EURUSD in the wake of the Bernanke Speech after hitting its highest level since January. The 1.4000 area appears to be large psychological resistance area for now. I feel we may see more corrective activity this week. The past two days have produced some potential reversal candle signals. The two charts below reflect this, the first one is the daily Spot FX chart, the second chart is the CME EURUSD future.
Finally the 4-Hour chart (below) appears to reflect the above, showing strong bearish divergence on both RSI and MACD, and also a failure at the rising trendline of the past months rally. Short-term, I think we may see an attempt at 1.3860-80, where a shallow trendline of the 2 weeks intersects, below it is quite possible we see a deeper move to 1.3580 (38.2% retrace).
My post today will focus on what is going on with financials and housing. In recent weeks I have made various references to how the financial sector continues to lag this market. Using the Phili Bank Index as a proxy for the financial sector, at times the financial sector has threatened to move up, but every times it tries it gets shunted back down again. This week the SP500 once again moved higher, however the Bank Index yet again failed to follow suit and ended the week having endured a torrid time. On Wednesday morning the Bank Index made a small break up through resistance on the open only to completely reverse and by Friday's close had lost around 7% from Wednesday's high. This can be seen on the chart below showing the SPDR Bank Index ETF.
What worries me is that the financial crisis of the 2007/2008 saw a big divergence between the broader indices and the Bank Index through 2007 prior to the collapse in 2008. The top chart shows this below, the second chart shows how we are once again seeing a strong divergence.
The next pair of charts show the Phili Housing Index (an index of 27 stocks representative of the housing sector) and the SP500 over the past 5 years. Note how strongly these diverged through 2006 and 2007, then eventually in 2008 the housing index and the broader market started to move in unison, during 2009 both markets recovered then fell away in summer 2010, however rather like banking stocks the direction of the housing index and the broader market has diverged over the summer and fall.
There have been many analogies with regard to events throughout the 2007 - 2008 financial crisis, personally I prefer the analogy of a Tsunami, a substantial earthquake takes place thousands of miles away in the ocean (Sub-Prime) a wave races out in all directions, as it gets closer to the coast it grows larger, still those close to the coast have no idea it is approaching, then seemingly from nowhere utter devastation, often out of all proportion to the original trigger event. The thing with Tsunamis is they usually consist of many waves, not just one wave, this is often referred to as the tsunami wave train. The amount of time between successive waves, known as the wave period, is sometimes only a few minutes, in other instances waves are over an hour apart. Many people have lost their lives after returning home in between the waves of a tsunami, thinking that the waves had stopped coming. - I can not help thinking the waves of the Sub-Prime Tsunami have yet to have fully passed by, perhaps if Mauldin is correct, then Sub-Prime Act 2 is the next wave.
Perhaps the early indications are starting to show in the behaviour of the divergence between financials and the broader indexes. I am not sure the market is yet ready to succumb to the next wave, however the fingers of instability remain, and new ones appear to be emerging. It is possible the SP500 has one final spurt, helped by the impending arrival of QE2 and a stated change to the Feds Inflation target, which could see a move back to the highs of April 2010 or perhaps a touch higher (the 2007 divergence of financials and the broader index happened as the SP500 made a slight new all-time high) or perhaps it could succumb sooner. - One technical analysts I follow is 'Humble Student', he believes we are very close to the next tsunami wave. I have come to respect his calls after following him for a while, he provides lots of alternative technical analysis methodologies and nailed almost to the minute the 'Flash Crash', and the low and rally in late August/early Sept (thus in my opinion enabling him to avoid the moniker easily attached to so many Tech-Analysts of 'Perma-bear'). His timing has not been perfect thus far on this call, however if something so big and significant is about to hit either soon or after a small delay, then exactness on timing is probably not the most critical issue here.
EURUSD
Friday saw a sharp turnaround in the EURUSD in the wake of the Bernanke Speech after hitting its highest level since January. The 1.4000 area appears to be large psychological resistance area for now. I feel we may see more corrective activity this week. The past two days have produced some potential reversal candle signals. The two charts below reflect this, the first one is the daily Spot FX chart, the second chart is the CME EURUSD future.
Finally the 4-Hour chart (below) appears to reflect the above, showing strong bearish divergence on both RSI and MACD, and also a failure at the rising trendline of the past months rally. Short-term, I think we may see an attempt at 1.3860-80, where a shallow trendline of the 2 weeks intersects, below it is quite possible we see a deeper move to 1.3580 (38.2% retrace).
Friday 15 October 2010
SP500 and the 1970s Redux Revisited.
I have noted on a couple of occasions this year how there has been a strong similarity between the bigger price action from the mid 1970s and the price action over the past few years. I have termed this as '1970s Redux', this has never been a key part of my viewpoints on the market, however it has formed part of the backdrop to my major views along with my own long-term trend following system, (which unlike the 50/200 moving average, cross did not give a sell signal this summer), together with my own analysis of longer-term trends and price action. In the wake of recent moves I have decided once again to check the progress of the market against the mid 1970s price action. The chart below shows the SP500 from the early to mid 1970s on the upper chart, with 2006 - 2010 on the lower chart. On the face of it, the most recent move up seems to have made a significant break higher above a key resistance line, I do have a slight reservation with regard to this line, which I will address in the next chart below, however it is hard to ignore the strong similarities and how well the two charts have been synchronised in the big picture. Of course as I always point out there are no guarantees this will continue, however I also believe that one should give it due consideration. One reason I particularly like this chart is that the economic environment of the mid 1970s was not too dissimilar to the current environment, not in the specifics but with regard to the fact that the mid 1970s was a time of intense economic uncertainty.
Anyway on that note bid you all a great weekend...
However, before I go 'Something for the Weekend '. - Stones -- Pure Classic, enjoy.
With regard to the concerns relating to the nature of the declining trendline on the above charts, the break up through the line in early 1976 saw a dramatic rally in the SP500. I am not altogether so sure we will see such a repeat this time: My reasoning for this is that the current line has only 2 prior touches on it, whereas the 1976 line had 4 prior touches. Technically that made the line in 1976 a much more significant area of resistance. However, that does not mean it won't happen, and I will elaborate on why I think something similar, though probably less dramatic, could occur. The 1970s chart produced one big line of resistance, whereas the current market has produced 2 lesser lines of resistance, the first line is highlighted below as a dotted line. - The first approach to this line was firmly rejected in Oct 2009, but was soon breached in Nov/Dec 2009, with a re-test in Jan/Feb this year. This re-test was crucial since it provided a key base level for 2010 (though it did suffer a minor breach in early July, this could not hold). - Now that the second resistance line has been breached, this could give this greater upside impetus in the coming months, in the same way that the one strong resistance line of 1976 was breached. I still do not expect the dramatic move of early Jan 1976, but I do not rule out a move of a similar magnitude perhaps occurring over a slightly longer period of time. It is also quite possible that before that occurs the SP500 could retest the trendline break (which could take it towards a broad range of roughly 1110-1135), with a failure to hold that line probably ruling out any further upside and bringing the risk of a full blown bear market back into play.
Just to add some more perspective to the bigger picture. In the wake of the January 1976 rally, the environment became much more challenging. The market spent most of 1976 meandering sideways, with a couple of short-term spikes higher, before falling away again in 1977. I could easily see that analogy continuing in the wake of a failure of further Fed action to revive the economy through 2011 - (See Chart Below) .
Anyway on that note bid you all a great weekend...
However, before I go 'Something for the Weekend '. - Stones -- Pure Classic, enjoy.
Thursday 14 October 2010
SP500 comment and EURUSD FX.
The SP500 continues its progress, the strong gains yesterday (on good volume) were paired back into the close, however futures are showing a strong performance in overnight trading. The Bank Index again failed to maintain a break over 48.00 having opened above there in the morning, this is something I still feel should be watched with half an eye. Just as an aside, I do not often mention market commentators, as I feel that an awful lot of them blow their own trumpets loud enough, but occasionally there are one or two who I follow and read whom I feel are worthy of a mention. One who I have mentioned on a couple of occasions this year is Doug Kass, I have read his commentaries for many years, and though he does not get all this calls right (who does), I do take notice when he makes a point, take his July call for example when he said that he feels that a low is in for the year in Stocks, not bad considering the world and his wife were bearish at that point. BTW he does not think QE2 will work, but then that is probably a story for next year.... Anyway I digress, the commentator I wish to mention is 'Mike Swanson' of Wall Street Window, if you have time have a look back over his commentaries of the past couple of years (Can be seen by clicking the Recent Articles Link on the Right Hand Side of his page). I find that his commentaries are extremely well written and presented and his arguments and forecasts stated in a clear and sensible manner.
I have taken a couple of excerpts which stand out to me. The first one is from July 2009
This Is A Bull Market - Mike Swanson (07/27/09)
It is tough to really tell how high the market may go up or for how long, but my guess is that we'll at least see it go up into the first quarter of 2010 and we could easily see the S&P 500 go into the 1150-1250 by then. 1150 would be a 50% retracement of the high of the Fall 2007 and the March 2009 low after that who knows.
The second one from January of this year.
2010 Stock Market Money Map
I suspect the market will trade in a wide 15-20% range for most of 2010 during which people will
get overly bearish on the pullbacks and too excited on the rallies. The problem is most people will either be too bullish or bearish during this time and will end up getting shaken out of their positions or trying to trade too much. The bulls will try to hold on too long while the bears will make the mistake of thinking every temporary dip is a new crash. They didn’t realize that the market environment had
changed, because they focused on their own hopes and the news instead of real market trends.
I don’t want to give you my guesses, but only keep you informed on what the stock
market is really doing and when it comes to the stock market the most likely thing it is going to do is go sideways in the first half of 2010 and then make a big move one way or the other towards the end of the year. And that is enough to know to make big money.
Moving on to the currencies.
EURUSD
The EURUSD has broken up through 1.4000 (and 1.4100 as I write), following a pause and small correction last week. - It is quite possible that this is going to continue rallying for a few more weeks (helped by prospects for QE2). The weekly chart below highlights the current EURUSD. The rally following this consolidation has taken this clear of the 61.8% Fibonacci correction and this may well now be heading to at least the 76.4% correction at 1.4375. What is interesting is that this level is close to a cluster of other resistances and levels. The main one, not shown on the chart below, is the line connecting the summer 2008 highs and the late 2009 highs, this crosses in the next few weeks at around 1.4560/70. Then there is the Dec 2009/Jan 2010 congestion from 1.4270/1.4580, the 61.8% correction of the decline from the 2008 high to the 2010 low is at 1.4448 and resistance from the top of an Andrews Pitchfork occurs around 1.4570 (that level again). - I believe yesterdays low at around 1.3913 should be critical for the rally to continue (In the short-term) - finally, there is also a large sloping Head + Shoulders pattern on the weekly, which projects this higher to 1.4800 - 1.5000.- (The chart below highlights most of these points).
Also of interest is the Monthly Chart. I have attached a copy of this below. It appears the failed breakout in Q2 of this year may actually have been a signal of a huge Failed 'Head + Shoulder' pattern. If this does turn out to be the case then this has strong Long-term bullish implications for the EURUSD, with a strong risk of new all-time highs for the pair, particularly if the high from last December in the low 1.5000s cedes. What I like about this is there is also quite a strong Fundamental rationale for this to occur. Put simply the Fed may be close to making inflation a goal, whilst the ECB (Pseudo Bundesbank) would never countenance that in a hundred-thousand lifetimes of the planet Earth. Given that inflation devalues a currency considerably, which currency would you want as a store of value, given a choice of the two.
I have taken a couple of excerpts which stand out to me. The first one is from July 2009
This Is A Bull Market - Mike Swanson (07/27/09)
It is tough to really tell how high the market may go up or for how long, but my guess is that we'll at least see it go up into the first quarter of 2010 and we could easily see the S&P 500 go into the 1150-1250 by then. 1150 would be a 50% retracement of the high of the Fall 2007 and the March 2009 low after that who knows.
The second one from January of this year.
2010 Stock Market Money Map
I suspect the market will trade in a wide 15-20% range for most of 2010 during which people will
get overly bearish on the pullbacks and too excited on the rallies. The problem is most people will either be too bullish or bearish during this time and will end up getting shaken out of their positions or trying to trade too much. The bulls will try to hold on too long while the bears will make the mistake of thinking every temporary dip is a new crash. They didn’t realize that the market environment had
changed, because they focused on their own hopes and the news instead of real market trends.
I don’t want to give you my guesses, but only keep you informed on what the stock
market is really doing and when it comes to the stock market the most likely thing it is going to do is go sideways in the first half of 2010 and then make a big move one way or the other towards the end of the year. And that is enough to know to make big money.
Moving on to the currencies.
EURUSD
The EURUSD has broken up through 1.4000 (and 1.4100 as I write), following a pause and small correction last week. - It is quite possible that this is going to continue rallying for a few more weeks (helped by prospects for QE2). The weekly chart below highlights the current EURUSD. The rally following this consolidation has taken this clear of the 61.8% Fibonacci correction and this may well now be heading to at least the 76.4% correction at 1.4375. What is interesting is that this level is close to a cluster of other resistances and levels. The main one, not shown on the chart below, is the line connecting the summer 2008 highs and the late 2009 highs, this crosses in the next few weeks at around 1.4560/70. Then there is the Dec 2009/Jan 2010 congestion from 1.4270/1.4580, the 61.8% correction of the decline from the 2008 high to the 2010 low is at 1.4448 and resistance from the top of an Andrews Pitchfork occurs around 1.4570 (that level again). - I believe yesterdays low at around 1.3913 should be critical for the rally to continue (In the short-term) - finally, there is also a large sloping Head + Shoulders pattern on the weekly, which projects this higher to 1.4800 - 1.5000.- (The chart below highlights most of these points).
Also of interest is the Monthly Chart. I have attached a copy of this below. It appears the failed breakout in Q2 of this year may actually have been a signal of a huge Failed 'Head + Shoulder' pattern. If this does turn out to be the case then this has strong Long-term bullish implications for the EURUSD, with a strong risk of new all-time highs for the pair, particularly if the high from last December in the low 1.5000s cedes. What I like about this is there is also quite a strong Fundamental rationale for this to occur. Put simply the Fed may be close to making inflation a goal, whilst the ECB (Pseudo Bundesbank) would never countenance that in a hundred-thousand lifetimes of the planet Earth. Given that inflation devalues a currency considerably, which currency would you want as a store of value, given a choice of the two.
Wednesday 13 October 2010
Equities - the path of least resistance appears to be up.
For now at least the path of least resistance for equities appears to be up. Whatever the reason or rationale, buyers are currently in control, and until this changes, it would be safest to assume there are further highs ahead. The consolidation of recent weeks appears to have finally ended,and it would appear we are now making a thrust away from this, indeed this move appears to be occurring across a number of markets, which adds credence to the idea of further gains ahead. The charts below echo this point, the first set of charts show a selection of US equity indices, the second set of charts show the DAX index and Eurostoxx Index futures this morning.
The next chart shows the VIX index, this appears to have made a break below a large Descending Triangle over the past few months, this drop in volatility below support should be a favourable development for equities.
The next chart shows the VIX index, this appears to have made a break below a large Descending Triangle over the past few months, this drop in volatility below support should be a favourable development for equities.
The last chart is the old laggard, the KBW Bank Index, this still lags the rest of the market, however interestingly it is very close to completing an inverse Head + Shoulders continuation pattern, a clear break up through 48.00 (it closed marginally through here last night) would suggest this may finally start to join the Bullish party.
Tuesday 12 October 2010
Mastering Psychological and Emotional aspects is critical in trading.
With conditions very quiet yesterday, (though this morning seems a touch more spicey) I thought I would break from my usual analysis and instead comment on one of my favourite subjects 'Trader Psychology'.
Understanding and appreciating the psychological and emotional aspects of trading, is in my opinion probably the most important part of trading, if one is to truly be successful over the long term. A trader could possess the best trading system/method, the optimum risk and money management techniques, and a deep knowledge of markets, however if this is not underscored by the correct mental attitude it could all count for nothing. Plenty has been written on this subject over many decades, yet achieving and mastering the psychological aspects of trading is something that still eludes the majority of traders. In ‘One-Way Pockets’, a book written in 1917 by Don Guron, which looked into the activities of the most active traders at a brokerage firm, Guron wrote ‘The fact that impressed me most forcibly was the trading methods… ………..may be classed with a number of psychological phenomena that cause the great majority of speculators to do the opposite of what they ought to do’. Later in the book Guyon says, ‘The man who applies this or that method successfully must be able to exercise patience and self-control to withstand all forms of mental temptation, to ignore the dictates of fear and greed.’ Jesse L.Livermore touches on it too in ‘Reminiscences of a Stock Operator’ published in 1923. ‘The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the man of inferior emotional balance, or for the get-rich-quick adventurer. They will die poor.’
In the acclaimed classic trading book Market Wizards published in 1989, Jack D.Schwager conducted a series of interview with successful traders. In the preface to the book Schwager asks ‘What sets these traders apart?’ He answers this by saying that ‘Most people think that winning in the markets has something to do with finding the secret formula. The truth is that any common denominator among the traders I interviewed had more to do with attitude than approach’. In the sequel ‘The New Market Wizards’, Schwager says ‘The secret to success in the market lies not in discovery of some incredible indicator or elaborate theory; rather it lies within each individual’. I could go on but I think I would be labouring the point.
The factors I mentioned earlier; trading system/method, money/risk management, and knowledge of markets, are the essential pillars of a successful trading approach. Yet there is nothing is more crucial than to understand oneself and the psychological aspects of trading if one is to overcome the many self-induced obstacles that contribute to trader underperformance.
I will paraphrase Bruce Lee* here, 'To know oneself is to study oneself in action with the markets'.
*Bruce Lee is of course better known as the great martial arts exponent and actor of the early 70s, however he was also an accomplished student and great advocate of philosophy. His core belief was to 'Know Yourself', and the quote I paraphrased originally went ' To know oneself is to study oneself in action with another person'.
Understanding and appreciating the psychological and emotional aspects of trading, is in my opinion probably the most important part of trading, if one is to truly be successful over the long term. A trader could possess the best trading system/method, the optimum risk and money management techniques, and a deep knowledge of markets, however if this is not underscored by the correct mental attitude it could all count for nothing. Plenty has been written on this subject over many decades, yet achieving and mastering the psychological aspects of trading is something that still eludes the majority of traders. In ‘One-Way Pockets’, a book written in 1917 by Don Guron, which looked into the activities of the most active traders at a brokerage firm, Guron wrote ‘The fact that impressed me most forcibly was the trading methods… ………..may be classed with a number of psychological phenomena that cause the great majority of speculators to do the opposite of what they ought to do’. Later in the book Guyon says, ‘The man who applies this or that method successfully must be able to exercise patience and self-control to withstand all forms of mental temptation, to ignore the dictates of fear and greed.’ Jesse L.Livermore touches on it too in ‘Reminiscences of a Stock Operator’ published in 1923. ‘The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the man of inferior emotional balance, or for the get-rich-quick adventurer. They will die poor.’
In the acclaimed classic trading book Market Wizards published in 1989, Jack D.Schwager conducted a series of interview with successful traders. In the preface to the book Schwager asks ‘What sets these traders apart?’ He answers this by saying that ‘Most people think that winning in the markets has something to do with finding the secret formula. The truth is that any common denominator among the traders I interviewed had more to do with attitude than approach’. In the sequel ‘The New Market Wizards’, Schwager says ‘The secret to success in the market lies not in discovery of some incredible indicator or elaborate theory; rather it lies within each individual’. I could go on but I think I would be labouring the point.
The factors I mentioned earlier; trading system/method, money/risk management, and knowledge of markets, are the essential pillars of a successful trading approach. Yet there is nothing is more crucial than to understand oneself and the psychological aspects of trading if one is to overcome the many self-induced obstacles that contribute to trader underperformance.
I will paraphrase Bruce Lee* here, 'To know oneself is to study oneself in action with the markets'.
*Bruce Lee is of course better known as the great martial arts exponent and actor of the early 70s, however he was also an accomplished student and great advocate of philosophy. His core belief was to 'Know Yourself', and the quote I paraphrased originally went ' To know oneself is to study oneself in action with another person'.
Monday 11 October 2010
The JPY crosses and the SP500
On Friday I mentioned that my bias on the SP500 is to the upside based on the weight of Technical Arguments, however I also said that I have not been participating in this rally as I had a number of concerns. I did not think Friday's payroll produced a set of data worthy of the reaction, though the market seems to favour poor data almost more favourably than better data as it suggests more likelihood of QE2.
One other concern I have, which I did not mention last week, is the most recent performance of the EURJPY and the AUDJPY FX crosses. I consider these two crosses as key barometers of risk-on v risk-off. They fell sharply with the stock market in 2008 and rallied well in early 2009 as the stock market turned, though the EURJPY rally fizzled out through the remainder of 2009. Through this year their moves have been quite well correlated in direction (if not magnitude) with moves in the SP500, however as the SP500 has rallied recently, these two crosses have started to stall out again. This can be seen on the next couple of charts, the first charts show the SP500 v EURJPY, note how the price has fallen out of the recent rising channel on the EURJPY, the second charts show the SP500 v AUDJPY, the AUDJPY has been in a big sideways consolidation for three weeks now.
I make these points as observations at this stage rather than suggesting we are about to go into full scale reverse on the SP500. The AUDJPY though is interesting in particular, and I think any sustained breakout of this consolidation may offer some clue as to which way the SP500 may head, and should therefore be watched closely.
Just to reflect my confusion as to the bigger picture, I am posting the some charts of 5 year Credit Default Swaps form Italy,Spain, Ireland and Greece. These seem to be suggesting that fears with regard to these may be easing, given the recent Euro strength this is probably not surprising, still if this continues it should suggest less risk aversion. It is however possible that fears surrounding the PIIGS issue could be a red herring, as in general this has not had a high correlation with the fortunes of the SP500 other than during the period of May-June this year.
One other concern I have, which I did not mention last week, is the most recent performance of the EURJPY and the AUDJPY FX crosses. I consider these two crosses as key barometers of risk-on v risk-off. They fell sharply with the stock market in 2008 and rallied well in early 2009 as the stock market turned, though the EURJPY rally fizzled out through the remainder of 2009. Through this year their moves have been quite well correlated in direction (if not magnitude) with moves in the SP500, however as the SP500 has rallied recently, these two crosses have started to stall out again. This can be seen on the next couple of charts, the first charts show the SP500 v EURJPY, note how the price has fallen out of the recent rising channel on the EURJPY, the second charts show the SP500 v AUDJPY, the AUDJPY has been in a big sideways consolidation for three weeks now.
I make these points as observations at this stage rather than suggesting we are about to go into full scale reverse on the SP500. The AUDJPY though is interesting in particular, and I think any sustained breakout of this consolidation may offer some clue as to which way the SP500 may head, and should therefore be watched closely.
Just to reflect my confusion as to the bigger picture, I am posting the some charts of 5 year Credit Default Swaps form Italy,Spain, Ireland and Greece. These seem to be suggesting that fears with regard to these may be easing, given the recent Euro strength this is probably not surprising, still if this continues it should suggest less risk aversion. It is however possible that fears surrounding the PIIGS issue could be a red herring, as in general this has not had a high correlation with the fortunes of the SP500 other than during the period of May-June this year.
Friday 8 October 2010
Equities update going into Payrolls.
With payrolls today, followed by the Colombus Day holiday on Monday, basically just about anything can happen. Yesterday probably saw some position squaring going into this, I still favour the upside after this weeks price action, though I do have some concerns particularly with regard to Breadth which I covered in yesterday's post (which can be seen by clicking here). I would not be surprised however if there was some sort of test of the lower side of the recent rising channel of the past couple of weeks, particularly on a poor payroll number. (Hmmmmmm, perhaps a bit too much fence sitting)
Further to yesterday's posting regarding Breadth, I am posting a chart below showing a strong similarity between the way price action is unfolding now and how price action occurred in March/April this year. As the chart shows, both periods produced upward sloping rising channels, following a prior very strong rally. In addition in both cases Momentum started diverging, and as I mentioned yesterday, breadth, as measured by the '% of SP500 stocks above their 50 day moving average', was at levels suggesting a possible top soon. I always like to point out that a re-occurrence of a price behaviour (particularly one event), does in no way mean a repeat is on the cards, however it is something I feel needs watching. - A scenario I am considering is that the current QE fever, which is propping up stocks and continues to weaken the USD, plus hopes about the upcoming election, could be the spur that keeps the bull running for a few weeks longer. I know that is highly speculative, but certainly possible, after that then a possible top may start to form, or we could just drift off from here on a break of the lower channel. - Lots of options really, I guess best get payrolls over and done first.
One further point, as I mentioned above, my bias is long right now, personally I am not actually long trading wise. My bias is long because current analysis on what has actually happened, suggests the upside is favoured at present, I am not actually long because I harbor too many doubts right now. If I decide to take a long position, it will probably only be short-term with a tight stop trailed higher. One of my anxieties, in addition to the above, and certain other issues raised in the past couple of weeks, is the inverse Head + Shoulders pattern, I am not a big fan of H+S patterns generally, particularly as continuation patterns, I find them somewhat unreliable as trading signals, however that does not mean they should be ignored. On the other hand I am a big fan of H+S failures, they tend to be far more reliable as indicators, though obviously a failure is not currently a feature of this market at present.
Finally, something for the weekend. This week some unbelievable cycling skills from a young Scot Danny MacAskill , this is a video well worth watching, the backing track is pretty good too, enjoy:
Some nice cycling skills, but still probably easier than calling US equities over the past 6 months.
Have a great weekend.
Further to yesterday's posting regarding Breadth, I am posting a chart below showing a strong similarity between the way price action is unfolding now and how price action occurred in March/April this year. As the chart shows, both periods produced upward sloping rising channels, following a prior very strong rally. In addition in both cases Momentum started diverging, and as I mentioned yesterday, breadth, as measured by the '% of SP500 stocks above their 50 day moving average', was at levels suggesting a possible top soon. I always like to point out that a re-occurrence of a price behaviour (particularly one event), does in no way mean a repeat is on the cards, however it is something I feel needs watching. - A scenario I am considering is that the current QE fever, which is propping up stocks and continues to weaken the USD, plus hopes about the upcoming election, could be the spur that keeps the bull running for a few weeks longer. I know that is highly speculative, but certainly possible, after that then a possible top may start to form, or we could just drift off from here on a break of the lower channel. - Lots of options really, I guess best get payrolls over and done first.
Finally, something for the weekend. This week some unbelievable cycling skills from a young Scot Danny MacAskill , this is a video well worth watching, the backing track is pretty good too, enjoy:
Some nice cycling skills, but still probably easier than calling US equities over the past 6 months.
Have a great weekend.
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