Stocks to Cascade?


Friday’s price action appears to have setup the next move in the US Stock Indices.  The S&P chart reflects the picture.

S&P Daily Cash (chart through the courtesy of www.marketvolume.com)

Notice:

  • As the S&P climbed higher, volume decline
  • On Friday, we saw a small, range neutral bar. This pattern often precedes the start of the move opposite to the prevailing direction – in tjis case from up to down.

If my preferred scenario works out, we’ll see a successful retest of the Primary Buy Zone 2560 to 2532 (basis cash) around February 23 to 27.

Monday is President’s Day, a public holiday. So, expect the volume to be light. I expect the down move to begin in earnest on Tuesday.

What are the alternatives?

  • The down move won’t happen and indices continue up to test 2873.
  • The down move accepts below 2532 and its maximum extension. Such a move raises the possibility of a bear market rather than a correction.

 

Next Move Down? S&P

Suffering  jet lag so I may as well put the time to good use by updating the S&P scenario.

The S&P CFD chart below shows that the setup phase I described in the last blog has occurred.

S&P CFD 18-day Swing

A sell signal triggers if:

  1.  Prices exhibit a bearish conviction close below 2700 before
  2. Acceptance above 2765.

The signal targets at least 2552 to 2527.

The  60-min CFD chart shows I have a relatively safe entry below 2718. Given the volatility, I’ll look to be a seller on stop at 2709; if done, my initial stop will be above the reaction high, currently 2739.

S&P CFD 60-min

The 60-minute also shows momentum divergence at correction highs. This divergence I wanted to see ahead of taking the trade.

The final chart, the ‘S&P cash-with-volume’, shows the declining volume I prefer to see when I am looking to sell new highs.

S&P Daily Cash www.marketvolume.com

REMEMBER, if we saw acceptance above 2765, the sell setup aborts.

The Stockamarket Roadmap for February 2018

The price action of the past few days has clarified my trading options for US Stock Indices.

The chart below shows the S&P. Note that despite yesterday’s much larger range, it’s volume was only incrementally larger. This tells me that much of yesterday’s activity was short covering. It also suggests that given the price structure since the decline, we’ll probably see a new correction high that is followed by a retest of the correction lows.

S&P Cash Daily

The next chart is the S&P CFD (includes Globex). It identifies my preferred zone and setup. 

S&P CFD Daily

My preferred zone is a move above 2725, holding 2765 and then having a bearish-conviction close below 2700.  Ideally, we’ll see the sell signal around Feb 20 to 21.  I’ll be looking for a closer entry to the reaction high once we see a move above 2725.  At this stage, my preliminary stop loss will be above 2765. Again, I’ll be looking for a tighter stop once the setup occurs.

I have to board my flight to LA. I’ll post the other alternatives as soon as time allows.

A HK Cab Driver’s Tale

 

Yesterday, I grabbed a cab from the office to home – but before I tell you the story, an important announcement. I’ll be travelling to LA tomorrow and won’t be back in HK until Feb 21. I’ll start my blog again on Feb 22.

Back to the story…as I was saying, I grabbed a cab yesterday…..

“Hey! Would you like to know why the world, especially the US stock market crashed? In the process, you’ll make a ton of money” said the cabbie as soon as I had made myself comfortable. 

“Sure!” I replied.

“Let me tell you a story.

In early November 2017, the Chinese government approached N. Korea and said:

“We all know the world’s stock markets are overvalued. It won’t take much to send them down, here’s what we do. We short the indices. You then set off some missiles, threaten Guam and so on. Stocks will crash! We’ll make a fortune!!”

Kim said: “That’s a wonderful idea! Let’s do it!”

But as with all plans of mice and men, the plan went astray: not only did stocks not crash, they moved higher, and higher and higher! Both countries lost a ton. So, on Jan 12, China stopped and reversed. It kept buying as the stocks, especially the S&P, climbed inexorably higher! 

Then the US, having lured in the longs and knowing the market was susceptible to a fall, begun selling and shorting big-time. The US indices were all fair game: S&Ps, Dow, NASDAQ, and the Russell.  Prices collapsed and went below the earlier November short entry.  So, the Chinese have had their fingers severely burnt over 600 S&P points in five months!

And the pain won’t stop until the Chinese give in to Trump’s trade demands”.

Just a story from a HK cabbie. I have no idea where he got it from. Still, it makes for interesting speculation, no?

 

The Bane of Unrealistic Expectations

What expectations do you have around your trading? Take a moment and think about the question. Take a pen, write down the answer. Ask yourself, are in aligned with the reality of trading.

The answer is not of academic interest. Indeed, it may make the difference between attaining and failing to attain your trading dreams and goals.

Let me tell you about Simon. He is in his mid-40s to early-50s and very successful in the business world. He took up trading about ten-years ago. Yet, despite his best efforts, he never made the mark in the trading world that he had made in the commercial universe.

Why?

Simon equates losses with failure, especially consecutive losses. Not the amount lost, but the fact that a trade was not in the black side of the ledger. His reaction to a loss was to double-down (think Martingale). The result was a series of decimations of his account.

My advice to Simon was to give up trading. He refused. He had succeeded in everything else in life; he did not see any reason why trading would be different. He persisted without changing his mindset about taking losses. A mutual friend told me the other day that Simon is no longer trading.

That’s the power of unrealistic expectations. They prevent us from accommodating reality and without accommodation, we are doomed to failure.

The belief structure we need to adopt to succeed?

As I see it:

  • On a trade-by-trade basis, the market is uncertain and random.
  • As a result, there is an inverse relationship between your average dollar win/loss and the time you hold a trade. So, the longer the timeframe, the larger your average dollar win needs to exceed your average dollar loss. Why? To compensate for your lower win rate. The shorter the timeframe, the higher your win rate has to be to compensate for lower average dollar win.
  • There will be times when you (and your method) will be so in sync with market conditions, that you can do no wrong. Recognize those times, press the opportunity, enjoy it while it lasts, and maintain your awareness that it can end at any time.
  • There will be times when you (and your method) will be out of sync. In these times, all you do will result in a loss. You need to find strategies to minimize the devastation this period will do to your account.
  • Sandwiched between the two, will be those times when your results will reflect the edge your method delivers over the large sample size.
  • Long-term success requires we continually add to our knowledge base and we continually convert the new knowledge into a skill. Market conditions change and so must you. Success comes with expending effort, time and money.
  • If you are a mechanical trader, no one system will cover all market conditions. You need to know the assumptions underlying your system so that you know:
  1. which system applies to today’s market conditions; and
  2. when the assumptions no longer apply.
  • Finally, recognize that you can break all the rules and make a ton of money in a trade or in a series of trades – but, not over the long-term. Inevitably, your mistakes catch up with you. This is why so many traders experience a humongous profitable experience only to blow-up.

So, my question to you: are your expectations aligned with the reality of trading?

 

In the Now Preparation

The last in series on the winning 10%’s mindset. We started with the brain’s structure, then looked at how that structure’s wiring lands us in the 90% losing camp. Today we’ll look at how to join the winning 10%.

The brain’s hard wiring responds to uncertainty by invoking our survival response: fight, flight or freeze (the ‘3-Fs’). And, it’s the worst reaction we can have when it comes to trading.  The counter we need? To assess market information employing our rational and emotional intelligences.  And, there are two practices that lead to that outcome.

The first is a daily practice of mindfulness meditation.

The benefits of mindfulness training for traders is now well documented. You need only Google “mindfulness for traders’ to see what I mean. There are even phone apps for both the IOS and Android to help us. Best of all, it takes only 20-minutes to 30-minutes a day.

For me, mindfulness leads to open awareness and acceptance of data that threatens my profitability. It allows me to engage both my left and right brains with the market information without raising the ‘3-Fs’. As a result, I make the best decisions possible.

If you have never meditated or tried and stopped, I’d recommend starting with 5-minutes and building from there. Use meditation music if music is your bag.  I’ve found a sensing headband (MUSE) provides additional benefits.

The other practice is preparation. Spend some time preparing and answering these questions:

  1. What’s the worst possible result for this trade?
  2. How would I feel if it happened?

It’s important to give the answers more than a passing thought. Many traders place stops with the attitude that they won’t get hit. As a result, when price action threatens the position, the survival response kicks in, and they cancel the stop!

A much better practice is to accept a loss before the trade is initiated fully. The practice will also tell you if you are taking too much risk.

So, over to you. What do you use to keep the 3-Fs away? Pop in a comment. We all can use new ideas.

 

Bull or Bear?

The price action on Feb 5, has crystallised the possible options in the S&P.

S&P Cash 13-week and 52-week Swing

We are in the wave (V) of the Ray Wave. I see two options:

  1. Wave (V) is in the process of sub-dividing. In this scenario, the S&P (casH) holds above 2650 and proceeds to make a new high. If this picture ensues, we’ll see wave (V) top out around 3334.
  2. Wave (V) is complete. We’ll see acceptance (bearish-conviction bar close) below 2531. The target for this correction would be around 2134 to 1810. The 1689 zone will need to hold. Acceptance below 1689 will suggest the uptrend has ended.

At time of writing (10:10 EST, Feb 6), the S&P CFD has done 90.50 points in the first 30-min of trading. Because of the sharp increase in volatility, it’s difficult to gauge whether we are likely to see a rotational day (sideways activity) or a one-timeframe (directional). My gut feel is the first hour will probably see the day’s range – suggesting we’ll see a rotational day. If we see a late range extension, we’ll probably see an upside close.

The close on Feb 6 will indicate the early direction for Feb 7:

  • A close in the top 25% of the range will suggest an early up move;
  • A close in the bottom 25% of the range will suggest an early down move.
  • A close between the 25% extremes, will indicate indecision, suggesting an inside day for Feb 7 trading.

Whatever happens, I’ll need to see a successful retest of the lows around 2550 to 2530 before saying:

  1. The low is in place, and
  2. Before saying that scenario 1 is the one likely to unfold.
S&P CFD 30-minutes

By the way, for those who asked: I’ll conclude the Mindset series on Thursday.

The Day of Reckoning

Folks we have the ‘Day of Reckoning’ in the US interest rate market.

The swing chart below shows:  For yesterday, a daily range (including Globex) of 3.42. To place the range into perspective, the current weekly range is around 2.9 with a standard deviation of around 0.90.

In short, in one day we saw a daily range that mirrored the upper boundaries of a normal 5-day range!

US Bonds (CFDs) Daily 18-day and 5-day Swing

What caused the volatility?

The tanking of US stocks. Traders were covering shorts and going long. Are they betting the FED will cut rates? Recent FED history suggests that if we see a downdraft in the stock market, the FED will come to its rescue.

The problem for the FED is it has little room to move. In its view, the economy is picking up steam, and it still has all those reserves sitting in the St. Louis Fed.

Asset Monetary Base https://fred.stlouisfed.org/series/BASE

Notice that before QE (2008), the deposits grew at a steady rate. After QE, deposits rose parabolically. At some point, they’ll need to repatriated or moved into Main Street. The FED needs to do this release gradually enough to hit its inflation target without causing hyperinflation.

My belief is it will do nothing – at least for the moment. It may delay the expected rate rise in March – that’s about three weeks away, so we’ll see. But, it’s unlikely will see a rate easing before then.

So, what we have is the US Bond market in an 18-day downtrend AND incredibly overbought. If the FED does not intervene, we should see a test of the lows – even if the downtrend is to abort. Great place for a short – which I effected just before the last night’s close.

The 290-min chart shows the ideal stop (CFDs) would be above 150.36; that’s too big a risk for me. So, I have lowered them to above 148.90. I also have a ‘soft’ stop – a stop based on what I don’t want to see if my scenario is incorrect.

US Bonds (CFDs) 290-min

My target is 142 (H&S target on the 18-day).

I may exit part of the position at yesterday’s low. I’ll do this if the Linear Regression Band shows momentum divergence on the 60-minute or 290-minute.

And oh….I almost forgot – I’ll talk about US Stocks tomorrow.

Buy on the Dip or Sell on the Rally?

Key question for US stocks: did we see a selling climax on Friday, Feb 2?

Friday saw the largest day down in the S&P cash (49 points) since June 24, 2016 (on that day, we saw a 71 point range down). Friday’s volume was also at extremes levels.  See chart below.

S& Daily; NB the range and volume

So, on that point, we might say that we have seen a climax. Also as Tom McClelland points out in this week’s Chart in Focus

VIX Spike Takes it Above All of its Futures

in the current S&P context, the fact that the Vix Index went above all its futures suggests a short-term bottom.

If this view is correct, a bullish conviction bar up on at least 15-20 points and average volume could be expected today. The price action would mark the beginning of the ‘automatic reaction’.

In the Wyckoff model, a selling climax is followed by an ‘automatic reaction’ and ‘secondary test’. If this picture unfolds, I’d be looking for sideways activity until Feb 23 to Feb 27 when the uptrend resumes.

But, it’s not the only view to keep in mind.

If we see another day down of at least 15-20 points on average volume,  then I’d consider we are seeing a correction of the swing from the March 11, 2016, low. This would call for a down move to at least 2724 to 2423, and probably the 2669 to 2624 zone (basis cash).

S&P Daily Yearly Quarterly and Monthly Trends

In the chart above, the green line shows the yearly swing, the black lines the quarterly trend and the red lines, the monthly trend. It shows how I derive the levels above.

Note that a move to 2669 to 2624, in this context, throws up an amber light on the uptrend. We’d need to focus on the subsequent rally to ensure that we see a healthy range, volume and momentum.

The final alternative is, we see on Monday, a small range day followed by ‘backing and filling’ price action for the rest of the week. Then, the indices may have one more shallow leg down followed that is followed by more congestion until Feb 23 to 27.

How do I determine the Feb dates? I have mentioned that I subscribe to The Market Timing Report. I find its cycle work useful in my trading.

A more important question is: as an 18-day swing trader (monthly trend), how would I trade the indices in Feb?

For now, I’d stand aside; at least until the most likely of the three options shows its hand; that may occur as early as in today’s trading, or it may take all week.

Let’s see what happens.