Weekly Trend Charts 12/31/10

These are basic price trend reference charts.   Charts are expandable in most browsers.  Left is a weekly bar.  Middle is daily bar.  Right is 60-min bar. 

S&P 500

 

Gold

Silver

Dollar Index

 EURO

Swiss Franc

Happy New Year.  Here's to a profitable 2011. 

Home Prices Continue to Weaken

That is according to the Case-Shiller Home Price Indices.  Here are the Charts:

The press release from Standard & Poor's can be found here.

Weekly Trend Charts 12/23/10

These are basic price trend reference charts.   Charts are expandable in most browsers.  Left is weekly bar.  Middle is Daily Bar.  Right is 60-min Bar. 

S&P 500

Gold

Silver

Dollar Index

EURO

Swiss Franc

Ron Paul Talks About Federal Reserve on C-SPAN's Newsmakers

The Socionomics Institute has recently pointed out that we can expect the polarizing battle between anti-authoritarians and authoritarians to grow as the depression grows.  The fight against the Federal Reserve Bank is part of that battle.  Ron Paul is an anti-authoritarian.  

Free-markets are anti-authoritarian.  Regulated and controlled markets offer different levels of authoritarianism.  As the depression grows, so will the polarization between the desires and activities between groups desiring more freedom and those desiring more control.   

60 Minutes: Day of Reckoning Arrives

I am no investment adviser (I am a trader), but for several years, when asked, I have given the opinion to family, friends and acquaintances that they stay out of municipal bonds.  Why have I had this opinion?  Because governments of all sizes across this country are literally broke.  60-minutes explains it in the video below:



"It will be something to worry about within the next twelve months" -Meredith Whitney

S&P 500 Stock Index Seems to Be Skating on Thin Ice.

If wave [b] of 4 is not preparing to top very soon, then the next best alternate count is that wave [2] is in its final subdivisions.

Our "Choppy Waters" and "Choppy Waters part-2" outlook in the S&P 500 stock index has kept us out of trouble recently.  Now, according to our Elliott Wave counts and diverging momentum indicators, it looks like those choppy waters have turned to thin ice.

The Polarizing Battle Between Anti-Authoritarians and Authoritarians Grows

Recent reports from the Socionomics Institute have highlighted the trend towards polarization that occurs in bear markets.  They even modified the very popular Nolan Chart in order to better illustrate this behavior as it relates to the polarizing battle between anti-authoritarians and authoritarians.  In the video below we see a real world example of this battle playing out.  And just think, this is happened during a large bear market rally.  It could get pretty ugly if the when the bear market returns in full force. 

Weekly Trend Charts 12/17/10

S&P 500

Gold

Silver

USD

EURO

Gold Update 12/15/10

A few days ago we talked about a line in the sand that the precious metals had drawn.  Gold crossed that line today and we sold it short in order to follow the potential new price trend.  Initial stops were calculated at 1432.50, but we are moving stops down to the high of the tern down at 1407.10. 

Currently, we have no price targets or objectives.  We are simply following a possible emerging price trend.  

Silver has not (yet?) confirmed this break. 

Tactical Risk Management Rather than Accuracy Should Be Focus of Trader

In addition to normal intermediate and longer term discretionary trading, I have worked on developing systematic trading strategies over the past three or four years.  So far my favorite of these strategies is a group of heuristics or algorithms that trades the e-mini S&P 500 in the short-term using intraday data.  We are going to use a test of this short-term e-mini strategy to talk about the importance of risk management verses accuracy in trading.

All of the strategies used are fairly simple and built around respect for price trend, letting winners run and cutting loses short.  It is a short-term trend follower, and developing it has taught me many invaluable lessons for trading.  One of those lessons is that risk management is by far more important than accuracy. 

If you are like me, you originally came to the financial markets because some accountant somewhere told you that you needed to invest.  That's what happened to me back in the late 90's when my best friend and I were running a wakeboard equipment (tow ropes and handles) production business literally out of our garage.  Sometimes my desire to know the who, what, why about things I am instructed or advised to do is annoying to those giving me the instructions.  This was no different. Instead of saying "OK, tell me what to buy" to our accountant, I decided I would learn about the markets.  Before that, I don't even think I knew what CNBC was (I still don't watch it).  That was years ago.  Today, oddly enough, I endeavor to work in these markets as my main profession.  Although it was not immediate, and lots of mistakes have been made along the way, I ended up finding great joy in solving these puzzles and riding these price waves.

When first entering the investing world, we all tend to think in terms of accuracy -wins vs losses, etc....  Its just natural.  If someone comes to you and asks you to invest in their operation that loses 60% of the time in their main activities, it is an immediate turn off.  Most investors are casual investors and never get past this idea that accuracy is of prime importance.  They what to know what to buy, when really they should be asking how much to buy, when to exit for a loss, or when to exit for a gain.  On this page, I am going to show you an example of risk management overpowering accuracy. 

There are two charts below.  The first one is a daily bar chart of the S&P 500 stock index cropped to only show the January 1, 2004 to August 13, 2004 period.  This is the period for the system backtest.  Why this period?  Personally, the 2003 to 2007 period was very hard on my intermediate and longer term discretionary trading.  These difficulties led me to developing systems to supplement accounts where I was only using personal discretion.  Within the 2003 to 2007 period, a look at the chart shows a particularly nasty sideways whipsaw land in 2004.  I like throwing the most difficult periods at my systems during tests, and this seemed like a good one to throw at it.  See for yourself on the chart.  

From Jan 1st to August 13th, 2004, the S&P 500 lost 4% of its value based on closing prices.  From the intraday high on March 5th, 2004 to the August 13th closing low, the loss to the stock index was 8%.  Again, we are looking at a sideways chop.          

The second chart is a graph of the trading system's equity curve, measured at the close of every single trade, represented in percentage terms for the same period.   

For the same period in 2004 that the S&P essentially went nowhere while actually losing 4% or more of its value, the trading system gained 21%.  But the idea that risk management is more important than accuracy has still not been shown.  For that, lets look a little deeper into the win vs. loss ratio of the system's trades. 

There were 79 trades to the system for that same period.  Only 34 of those trades were wins.  The remaining 45 trades were loses to capital.  So, the system only won 43% of the time, while losing 57% of the time.  Accuracy is not important!

What allowed the system to stay alive, to not go bust, to keep trading, and to actually return a hansom profit?  Risk management is the key to a successful trading business.  Only between 2% and 5% of capital was risked on each trade as recommended by my recent post on Equity Curve Trading.  In addition, stops were maintained diligently and moved with any trend that went in the direction of a trade placed.  Losses were cut short.  We did not wait for them to become winners.  We cut them immediately when the stop/loss level dictated by the trend following system was hit.  Winners were allowed to run.  We did not take profits at any certain level.  We let the trades run until they hit the stops that were moved along with the trend in a systematic and specific manor -similar to chandelier stops.  Trades were initiated only due to short-term trend signals that were themselves filtered by longer term signals.  We did not look at the news or opinion for our signals, we looked at price action.  

Bottom line, the trend signals are not very accurate, but they do allow you to catch trends that are developing.  It is the risk management that allows a trader to churn out the profits, not their acumen for knowing what the market is going to do next.  Granted, I do use discretionary and somewhat predictive in nature tactics for some of my intermediate and longer term work, but that is not where ultimate and lasting success is likely to come from.  Good and diligent risk management is where longevity and profitability in this business can be found.

By the way, the accountant from the background story was simply trying to sell me some loaded mutual funds.  I would not have even known what that meant at the time.  She wanted to make a little commission is what it meant.  This was not revealed at the time.  She seemed to be giving some "friendly" advice to people who already employed her part-time for other specific tasks.  After reading just a few books on markets and talking with her, it became pretty apparent that she did not really know much about investing and trading.  Its good to ask questions and want to understand the nuts, bolts, and details of what you are getting into because that is your first line of risk management.

Reemerging EURO Bear?

The EURO appears to be setting up for a potentially substantial intermediate term downtrend. 

A break below 1.295 would indicate a potential intermediate term downtrend as being underway.  Aggressive traders could even use the current buoyancy in that market to position ahead of the break if they want.  Trend followers can just wait for the break.  Initial risk could be calculated against a stop at one tick above the recent high of 1.4266, with the goal of tightening if the a downtrend is confirmed.  

Possible Trade Setup in Gold and Silver

Gold and Silver have drawn a line in the sand that needs to hold if an intermediate term downtrend in the precious metals is not to ensue. 

If Gold were to break below 1272.80, the probability of a tradeable intermediate term downtrend emerging would increase.  The same goes for silver with a break below 28.05.  A break of those lines in the sand would be reason to consider hedging physical holdings and / or speculating for profit on the downside.  

Prior to the signals being triggered, risk can be calculated against initial stops at 1432.50 in Gold and 30.80 in Silver.  We will likely tighten our own stops to the turn high immediately after the trigger, should it occur. 

Note: 
I continue to think it a good idea to clarify my view of gold and silver.  They are real money.  Unlike the unbaked fiat paper we carry around most of the time, they have intrinsic value .  When I post bearish set up for gold or silver, I am not suggesting physical core holdings be liquidated.  Far from it.  You should hold some physical gold and silver.  In fact, please use the dealer I recommend in the right hand column of this blog (click the gold or silver charts).  The posts about trading here are just that -about trading.  Trading price changes, that's all.  Trading can be for direct profit, or be used to hedge physical holdings of a commodity, or both.  Therefore, if and when I sell metals short, that does not mean I am suggesting physical holdings be liquidated.   

Weekly Trend Charts 12/11/10

The thought occurred to me that it might be time to try something new at the blog.  Weekly trend charts.  Many of the charts I post include semi-detailed technical analysis markings and forecasts or probability implications.  Using Elliott Wave and other forms of technical analysis to determine the most likely future trend in markets traded is a major part of my work, but it not all of it.  

One part of my regular work that has been mostly missing from this blog has been just regular price trend following.  Hopefully that void can be filled more and more moving forward.  It is true, I use systematic trading on these same markets in which I also use discretionary trading.  In fact, a large part of  current trading operations has become short-term systematic activities in the S&P 500 e-mini futures market. 

The difficulties in discussing the trend following part of my work is that I do not currently wish to use this blog to reveal in detail the heuristics and algorithms I use in these systematic operations.  What I would like to add to the normal discussion on this blog are some of the general ideas behind the practices.   Honestly, because there is no perfect system, knowing my exact systems would be less beneficial to most reading this blog than it would be to discuss the ideals, basic principles, and strategy goals those designs were built to address. 

I've already started talking about some of these ideas via a couple of posts about risk management.  Risk management is the most important part of systematic trading; far more important than accuracy.  There was also a post about using chandelier stops, a common systematic technical (technical =price trend analysis) stop placement procedure.  There was also a post about using moving averages to follow price trends.  

What seems to be missing now is a set of weekly chart posts showing the long, intermediate, and short-term price trend in several markets we are interested in. Although I don't plan to use the actual charts I trade off of, I am going to try to show charts that use basic measures of trend.  These basic measures might or might not change in the future.  

We will start out using something I learned from reading a report by Jeffery Kennedy over at Elliott Wave International a while back.  Kennedy's report was about using moving averages.  I forget exactly what Kennedy called it, but he suggested using a fast MA along with two slower MAs of each the highs and the lows.  The two slower MAs would both be the same length.  The result is a slow MA envelope about which the fast MA moves.  I thought it was a great concept.  You will be able to find his report at the EWI link above along with other great resources.  

One of the ways he suggested using this set up was to require the fast MA to cross above the slow MA of the highs (upper envelope band) before initiating a buy.  You would require the fast MA to cross below the slow MA of the lows (lower envelope band) before initiating a short sale.  You could exit a long position with the more sensitive requirement that the fast MA simply move below the slow MA of the highs or, alternatively, exit a short when the fast MA crossed back above the slow MA of the lows.  I think the way he put it was -slow entry; fast exit.  If the fast is in-between the envelope, then the signal would be neutral if using the rules above.  In my work, I too have found merit in using more sensitive exit parameters than for entry.  Another way to use these methods is to have a type of trend signal for entry and then different and more sensitive signal for exit.  In fact, that would more closely resemble my own short-term systems.  Definitely go to EWI and look for Kennedy's work as well as that of the other analysts there if you want to broaden your knowledge on markets, Technical Analysis and trading. 

It seemed to me that using this approach across three time frames would give us a good way to post basic trend charts on a weekly basis.  So here we go.

The charts below can be enlarged in most browsers simply by clicking on them.  They are read from left to right.  On the left is a weekly bar.  In middle is a daily bar.  On the right is a 60-min bar.  The charts on the left and middle are probably the most valuable.  The light blue line is the fast MA.  The two red lines are the slow MAs of each the highs and lows.  In these charts, the fast MA is a five bar MA.  The slow MAs are twenty bar MAs.     

S&P 500 

Gold

Silver

EURO

US Dollar Index

 

Announced Color of the Year Looks Backward Rather than Forward

According to Yahoo News, Pantone announced the color of the year for 2011.

"This year, they're forecasting a way more vibrant color: Honeysuckle!"

 "Honeysuckle is a captivating stimulating color that gets the adrenaline going - perfect to ward off the blues"

We think Pantone is simply looking backwards at a year that is ending with a rally in the stock indexes.  If our S&P 500 outlook is correct, we can forecast that they will be announcing a darker and more somber tone as the color of the year for 2012. 

Although our main job is to trade short, intermediate and longer-term price trends and to communicate our more intermediate and longer-term ideas via this blog, we would not recommend you ladies (or gentlemen) out there invest in too much Honeysuckle for your wardrobe.  Honeysuckle is set to be a short-term trend that will not last. 

New Trend Following ETF from RBS

According to Michael Johnston, RBS has launched a trend following ETF called Trendpilot.  The symbol is of course TRND.  This is cool!

It seems this product is going to use a 200-day simple moving average of the S&P 500 for its main trend measure.  The systematic technique employed will expose the fund to equities when the trend is up and to short-term US T-bills when the trend is down. 

I may be biased since I myself employ several trend following strategies, but I think this is a great idea.  We will just have to watch it's chart and see what it does.  At this point, there is not enough chart data to show if TRND's trend is going to be up or not.  Let's keep an eye on it and see what it does.

Another systematic trend following ETF is GTAA.  This one is new too, so not a lot of chart or trend information yet.  

One thought that crosses my mind is, once enough price data from TRND and GTAA is registerd, these funds could possibly be used to tell systematic trend followers when it is a good time to reduce risk to systems and when to increase risk -similar to the equity curve trading tests I recently did.  Perhaps the trends of TRND and GTAA will provide peripheral information in this way.  We will just have to wait and see.    

S&P 500 Update 12/07/10 -Choppy Waters, part-2

 

In the S&P 500 post a few days ago -"Choppy Waters", we suggested that the popular stock index was in a fourth wave.  We further expected this fourth to form as a triangle.  There was also an alternate listed: wave-4 as an expanded flat, where wave [b] of 4 exceeds the high of wave-3 before wave [c] begins.  Thanks to a slight penetration, the expanded flat scenario is now the highest probability count.  

Next in line in terms of probability would be that the entire wave [2] up is terminating.  A move in price below 1129.24 (cash market) would have us looking towards this more bearish alternate.  For now we are simply expecting more fourth wave action.  

It is also possible that the fourth wave is still forming a triangle.  It certainly would not be the first time the b-wave of a triangle extended a little past the origin of its corresponding a-wave.  Speaking of which, wave [b] could still be underway.  Today's reversal makes this less likely, but it is still possible.   

Should wave [c] down not penetrate low of wave [a] down, we will be looking at either a triangle or a running flat fourth wave.  If such a pattern occurs, it will have us turning towards a closer look at the internals to help us discern which one it is.   

So far this outlook has helped this trading desk stay out of trouble for the past few weeks.  Even our systematic short-term trading has has mixed / neutral signals indicating cash as the best place to have trading capital right now.

Jeff Bridges and Bear Markets

If you are into Socionomics, you will enjoy the post over at Professor Dennis Elam's blog "Jeff Bridges A Bear Market Success". 

For more on Socionomics, click here.

Choppy Waters

This has been a topic of various e-mails between myself and several trading buddies as of late, and today's action prompts me to post an update of my current Elliott Wave count and idealized model for the S&P 500 index.  

I used to barefoot waterski or wakeboard on a daily basis.  These sports are most enjoyable on calm glassy water.  We never liked getting out in significant wind chop back then, and my aversion to chop carries over into trading.  Like calm water for skiing, trending conditions are best for most trading practices.  Choppy consolidating price action simply eats up capital like choppy water eats up knees.

Fortunately for my short-term trading operations the trend filter I use to discern which direction is best for entering short-term trades has been in a neutral position over the past couple of weeks.  No trades have been allowed in either direction.  This has helped me preserve capital during the chop.  Now the Elliott pattern I have suspected as the culprit of this chop is emerging further out into sight.  

Unless the low of wave-[a] or the high of wave-3 on the chart above are taken out, I will continue to expect chop.  Either the idealized pattern above will persist or a new and more probable pattern will emerge.  Until then, prices are between two defined lines.  The wave-[a] (of  4) low is 1173.00 on the cash index.  The wave-3 high is 1227.08 on the cash index.  It appears we are in a wave 4 correction.

There is a catch though.  There is always a catch.  Welcome to the world of measuring probabilities.  Wave-4 could form as a flat, taking out the wave-[a] low right before reversing to exceed the wave-3 high.  If this happens, and the general model of a wave-4 is correct, then terminal support should be found somewhere between the 1155 and 1133 areas.  Contrarily, if wave-[a] is taken out by a supposed wave-[c]-of-4, only to then definitively take out the 1133 level, then we need to start thinking of it as being something other than wave-4-of-(C)-of-[2].  The next best alternative I can currently see would be wave-[3] down underway.  

And do you think that is the only catch?  Don't.  Wave-[b]-of-4 could always extend a little above wave-3's termination point, making everyone think wave-5-of-(C) were underway.  Corrections can be messy.  We will be lucky if the triangle continues.  It is such a nice and neat little package after all.  Its like I told one of my trading buddies today: based on the current set up and neutral indicators, if I still lived in the mountains, it would have been a ski day instead of a watch the markets day.  Sometimes the best trade is to not trade.  Just remember that markets are very adept and tricking everyone.  Be prepared for the unexpected, and stay tuned.   

Are there trades inside wave-4?  Sure.  Unless the model above needs to be changed, I probably will not be tracking those here.  But I will try to track the final termination of wave-[2] and the emergence of wave-[3] down.