Saturday, May 2, 2009

Weekend: Back in town

Back in town and 13 hours of sleep on me =) First off last week I was a bit slow with updates so lets make up for it over the weekend. Charts are a bit larger as I am back home with my larger monitors (let me know if you prefer smaller sizes).

SPY 150 min
First off lets take a look at our channel yet again. I made it 150 min and included after hours so you can see some of the channel end points a bit better. This is pretty much year to date on spy so you can see what we are working towards.

3 main patterns to look at. First of course the wedge in the dark blue outline. We had our breakout and failed as we had described in the past. Now interesting enough we created another very small trade channel here that is parallel towards the wedge trendline. You can see that new channel after we broke out is a lot narrower and has the same up angle as well. Narrow channels such as this cannot be sustained for long so I see us moving out of that range very soon.

Additionally our breakout using the triangle with a retest of the upper declining range. Still above which is bullish but with huge pressures on the 76% FIB levels.

Now let take a look at FIBs. As you can see we have had an incredible rally off the lows without any type of retracement. Normally on such strong moves you need to see wider ranges to allow buyers and sellers to distribute. This is not happening here, we keep on going up not allowing any breathing time in between. However the last hurdle you see here, 76% retracement level is going to be quite difficult to brech. We attempted a breah in January and Feburary to fail both times. We have the same challenge yet again and it is my feel that a break at this level will not occur. If we do see a breach here you can see that we have a lot of room without stopping all the way to 945. Of course you know my target of 912 that should stop the bulls.

At the moment the market is trapped and various patterns have tried their best to break above the 880 range but thus far have not successed.

1. Failed Wedge Breakout (blue) (keep in mind the failed wedge breakout pattern is bullish, where as the wedge itself is bearish with the assumption of seeing a reversal)
2. Bullish Continutation Triangle (yellow)
3. Mini channel (parallel to lower wedge line)
4. Larger up Channel

All of those patterns are putting immense pressure on the 76% range, however all patterns have failed for a clean break this far. We had one failed attempt thus far that occured on low volume and was quickly reversed just to gain traction again on the Mini channel and the triangle breakout range.

Now being a bear, all you can do is smile here and sit patiently. Bears have time on their side, bulls do not. Every day that goes by each bullish pattern will get weaker and weaker. Additionally the bulls have no choice but to make a break here and now. If we retrace first ALL of the current bullish patterns will be invalidated making it impossible to reattempt this range.

VIX Daily
Lets talk a look at the VIX. As you remember I had referred to the triangle on the VIX but missed another important pattern. A bullish lowering wedge. And what a wedge this is. As you remember for wedges I am looking for a breakout in the last 20% of the range. We are there at the moment and you can see what range we are shooting for as the first target. VIX is telling us breakout imminent if we follow my wedge breakout strategy. Now what else is showing us imminent breakout signs? Lets take a look at the BIG picture yet again.

S&P 500 Daily (2 years)
Ok first lets take a look at our bollinger bands. I made yellow circles around the areas where the delta between both bands was the narrowest. Additionally both bollinger bands are now above the 50dma - same as it occured last year May. Unless this is a new bull market (no comment) we will reverse towards the downside very soon. Also MACD and momentum both showing severe divergence. MACD at zero still !!!! Take a look at the range we are seeing in as our MACD continues dancing around the zero line, spinning tops that keep on stretching that rubber band until it will snap.

Its so easy to get emotional when you stop being rational and objective. Due to work and travel last week I had lost my objectivity yet again by not having focused on the markets and my head became consumed with "what if, what if" scenarios that had no support behind them. I am still short and will be adding strongly next week.


  1. Welocome back Chris. This is fantastic. i am getting greater understanding of technical analysys. Unfortunately I got stopped out of short position on Friday as I was away for the whole day. So I had put in trailing stops. Broke even except the broker, who take the little gains.

    With stress test coming out on Monday, what do you think the opening will be up or down. In either case would you wait for the new short

    I agree with you that Bears have time and bulls are under the pressure. Upside is limited, unless this is new bull market. With the present fundamentals and new bearish situation of the swine flu the market can topple big time. The only hope is that the virus mutate to hramless level. Fear will do the bulls in.

    I just have one theory. Smart money--hedge funds, GS etc. -- also do the technical analysys. Could they also create an alogrithm to incorporate the TA thinking of the community and since they are the market maker, they can try to fool everyone? Do you know, if such sophisticated program exist? This is like playing chess and anticipating the moves and be ready with counter moves.

    As you can see honest blogs reveal a good quality sentiment information that was not available when the desk tops did not exist. Sentiment was measured after the fact from news headlines and broker's and anlaysts buy-sell calls.

    Thanks Chris for yur help.

  2. Is it time to let go of the shorts? Or do we add to it from here?

  3. still in my shorts. And adding until 912.

  4. I added some shorts as i saw some negative divergence

  5. Chris, how does this look to you? a test of 880 and up attempt to break 900?

  6. a lot of work today due to being back in town. Not much time for the markets. Anything possible at this point and more pain for bears to come this week. Have not done much today. Will be adding more SDS this week though. Also shifting cash between accounts to balance out allocations. Moving some out of the short term trade account and putting into the long term account to be able to add a bit more shorts =)

  7. SDS @ 62 AVG

    One chunk left to add at 912 if we get there.

  8. S&P 900 - who would have thought? Not I.

    Here is something I apply a lot to life to see if I did something stupid or wrong.

    "Knowing what I know now, if I could go back in time, would I have done something differently?"

    If I am really honest with myself, I do not think so. While I would love to be able to say I could have gotten 200+ points on the long side of this rally, its not something I would have done.

    Also a good idea to re-read my long term outlook

    While its a bit outdated now we are nearing the end of this rally in terms of the time window I had anticipated. Price wise of course we are way off, more then I would have ever imagined. I have to admit I have been humbled by this price action we are seeing. 200+ points without a single retracement. Not something I have seen before and it cannot be ignored.

  9. It looks like spinners now, as you had described earlier. Is that correct?

  10. If you don't mind me asking, what are you putting as a stop price?

  11. you have a great ability to see the turning point Chris. i too added some more shorts.

  12. From a daily perspective not quite. We have had 4 up bars (including today) but volume is dropping significantly.

    If I have time tonight I will post some more updates with charts to give some better guidance as to what to expect this week. While all of this looks extremely bullish do the following and look at the May 2008 time frame.

    We are seeing almost the exact same setup. Back then we had 6 up days on low volume to makr the final move. Right now we are at day 4 of this last play. Thats why I am keeping a bit more for the 912 because to be quite honest - I think we can see that number this week. It has been a major target of mine, one I thought you never come into play ...

  13. "If you don't mind me asking, what are you putting as a stop price?"

    No stop, mental stop at the 912. Depending on how we get there and the price action around this point I will either take some off, hedge or just close out all accounts to open a tikki bar in the caribeans.

  14. Looks like it is going for that 912. How does the action look to you? Bearish?

  15. no 912 today. Nice looking wedge for the day but most likly not going to break down. Probably close at 904. Maybe another GAP up tomorrow.

    I have to admit, I do not know how much higher it will go the next few days. All I know is that by the end of this week we should be below 900.

  16. are adding shorts to your position? the last twovolume bars on SPY were impressive. If it gaps up tomoorw, it may be good entry. Or we may see the pullback tomrrow.

  17. I couldn't hold out, cut my sds for a loss :( I'm still in long gold and I'm thinking of starting to buy the dips and go long on oil. Your thoughts?

  18. One blog I follow has been fairly accurate in calling the next day's move (70 to 80%) i.e.the direction. I will wait for the pull back and unload may be around 880.
    Monday, May 4, 2009
    Tuesday's call
    The system is forecasting the market to pullback tomorrow.

    Probably a little risky to short this market.

    Will stay at 1.5x.

  19. Another good post I thought I share with you.
    copy and paste from

    Let's direct our attention to perhaps the most difficult rule that exists on my trading rules page:

    Exits - the only acceptable exit is either being stopped out of a position or reaching a target price which has a clear technical rationale, and even in cases of the latter, partial exits are preferable to outright closes.

    I have been following this rule very my IRA portfolio. But not in my big family account. And that has been really stupid, and I was pondering the difference.

    I've figured it out.

    My IRA portfolio has moved from $42,000 to $386,000 in the span of 15 months. The incredible irony of this is that (a) there is no margin available (b) no shorting is permitted (c) the commissions are about 300% higher than is reasonable. But it is, far and away, my best performer.

    But in my mind, I think I "allow" myself a lot more latitude with this account (let me apologize in advance for the gratuitous use of quotation marks in this post; I cringe whenever I see quotations used for emphasis, but in this case, I am using them for irony's sake, or at least to emphasize a point).

    In other words, because virtually the entire account is based on profits, my brain allows me to play a little more fast-and-loose with these positions and let the profits run. I allow myself, in a word, to be "foolish" with this account.

    How about my big account, though? That's quite another matter. Although it's built largely of profit, the percentage gain isn't nearly as big, so I tend to be a lot more "conservative" with it. Take this morning, for example - - I had a six-figure position on the XME. I quickly talked myself into getting out of the position. The little voice in my head said something like this:

    These profits could evaporate at any moment. The safest thing to do is to take the profits now, wait for a pullback, and then re-enter this position. I can have my cake and eat it too! I will enjoy these profits by banking them, and I will be that much more ready to re-enter the same sized position at a better price. Yay, me!

    Well, you know what happened. XME didn't pull back. In fact, it closed at its high of the day. So I wound up going back into the same trade at a higher price, which of course increases my risk.

    Do you see the difference? In one account, I "foolishly" left the positions alone, leaving my profits completely at risk (at least inasmuch as they are above any given stop price), and that was the right thing to do. In the other account, I "shrewdly" banked my profits, and that was a complete screw-up. The foolish thing to do was, in fact, the right thing to do.

    So what's wrong with the brain under this luxurious head of hair? What's wrong is that I'm not treating dollars as equals. I am somehow trying to protect and shepherd the dollars in my big family account in a way which is deleterious to my trading, and I am allowing the dollars in my IRA (which aren't as "real" since they are the product of outsized profits) to be more at-risk, and I am obeying the rules that God himself handed to me on that fateful day while I was sitting in the roof of my house.

    Learn from this. I'll try to learn right alongside you.

  20. its quite interesting and an easy analogy to my findings as well. A bit different context but similar.

    My small account, in terms of percentage has the largest gains. Why you ask? Well its only "little" money so if I loose that it does not hurt as much. I assume more risk per position but give the position enough room to get out via other strategies (double down on next level, etc) most of the time at a break even price.

    My large account, well, not good. Size wise I am talking around 1:10 - meaning the large account looses 10 times as fast (ok admit its 10 times as much but it just seems faster). Additionally a good position does not make 10 times the gains, quite a bit less.

    Trading is definitely not easy. The biggest challenge is emotions, something I still have a problem with. You can put whatever rule you want around your trading. Emotions will come back one way or another. Just have to know how to deal with it the next day.

  21. "I couldn't hold out, cut my sds for a loss :( I'm still in long gold and I'm thinking of starting to buy the dips and go long on oil. Your thoughts?"

    I have to admit, cannot blame you for getting out of your SDS. The past few weeks have been horrible being a bear. Much more then usual.

    The only recommendations I can give us manage your money/risk differently. Just give it a try. Lets say your SDS position was 100K total and you exited today. Meaning you assumed a risk of lets say $4000 (4%). You believed in the position otherwise you would not have gone with it.

    So next time, try the following, enter the position you want at 50K. Once you reach the level that becomes "painful" (just like the exit today), add SSO just before you are about to sell. And put SSO at a stop loss of 2%.

    What that will do for you, it will give you breathing room for a full 1% move of the market. During this time you will not make money or loose money. While you are at the 4% loss still you have a full percent to figure out what to do. Are you getting a pull back? Are you going to continue rallying? Even if you continue another 20 points. You are still break even.

    So lets assume it continues rallying towards 945 and you are still in both positions. Here you now have a "guarantee" (a very high probability trade) that the market will drop. Exit SSO, pile in some more for SDS (with the SSO gains or part of the position). So here you are at 945 and still have only lost a marginal amount and are much better positioned for a next move.

    Hedging has made a huge difference for me to control emotions. It took me a while before I saw the real value. When I started hedging I always ended up selling way too early. I mean if I go into a position to go short, what am I doing on the long side? I always got rid of the long way to soon and piled in too much on top of the short again.

  22. This comment has been removed by the author.

  23. I've always tinkered with the idea of hedging but I never executed it. Another thing I've been thinking was that if I hedge, with the daily rebalancing of a leveraged etf, wouldn't I still lose out if I held the hedge too long?

  24. SSO and SDS do not loose as much value as all the other leveraged ETFs. Much lower expense ratio and a pretty accurate tracking of the underlying instruments. You can hold SSO and SDS for a good few weeks or even months and still come out very well in comparison to lets say SRS, SKF, FAS/FAZ.

  25. also keep in mind there are different type of hedges. I look at hedges in 2 flavours. Direct hedges and indirect hedges.

    Direct = long sso and sds, short future a, long future b
    Indirect = short XOM, long oil, long/short energy index

    Both have valid places for different scenarios.