Monthly Archives: August 2011

31st August 2011 – Going short

I’ve just opened a very small short position on the Dow. I am treading very carefully with this, as we are at a point where markets could rise another 5% or more. However I like this as a point to get in.

Looking at the system chart below it is clear the Dow closed yesterday exactly at its Secondary Resistance Zone (the green line).

 

Please click for full image

There are some points of caution to note though.

This is the first test of this line. As such it is more prone to being broken.

My Market Health Check tool indicates that the buying has been strengthening in the last two weeks, but is still relatively weak

We’ve witnessed what could be a marginal lower low and higher high combination in the last fortnight.

We are leaving the summer and trading volume is picking up

There seems to be some genuine expectation in the market that QE3 is on the way (as ludicrous as this might sound!!!!) Continue reading

30th August 2011 – Just how much trouble are European Banks in?!

Over the summer I caught two interesting items about football. The first concerned English Premier League club Everton. Apparently their bank has refused to lend them any additional transfer funds. The second story concerned the news that the Spanish season was due to be delayed by a player-strike, protesting over the unpaid £44million owed to 200 players across the leagues.

My immediate impression was that these two items could well be indicative of a serious liquidity crisis brewing. I thought about writing about it at the time, but was on a break from blogging so stored the news until another day.

This morning however I read a shocking piece in the Telegraph.

If this is accurate (and we must remember the Telegraph’s anti-Euro stance) then things look pretty bleak for the Eurozone.

Once Bernanke had signalled no further intervention, I didn’t pay much attention to events at Jackson Hole over the weekend. I think I made a bit of a mistake here as Christine Lagarde, the new head of the IMF, has certainly caused a stir with her comments about the urgent need for the recapitalisation of Europe’s banks.

This is the same Christine Lagarde, who was French Finance Minister, immediately before joining the IMF. Leaving to one side the obvious question, “why she didn’t do anything about this when not only in a position to do so in France but also at a time when it was her job to do so?!” the wider issue is much more alarming. Continue reading

25th August 2011 – Waiting for Jackson Hole

I would have made a really good decision a fortnight ago. Stepping out of the market would have been exactly the right thing to do. The moves have been wild and I doubt many people could have predicted the swings. Had I been in I am certain I would have lost money.

However this doesn’t mean I haven’t been watching things closely.

For what it is worth I believe that we are now in a bear market. Even though the Dow looks like it might have made a higher low on August 19th, it will now need to breakout confidently through 11,500 for there to be any chance of the bull market being resumed, before further losses are incurred.

According to the system the Dow’s Primary Resistance zone is about 11,644:11,678. I would need to see a sustained move beyond this before I believe the bear has been laid to rest for the time being. I believe it is far more likely that we will in fact see a move back to the Primary Value Zone which is 10,458:10,474.

As things stand I would be planning to enter any market just yet. The severity of the selling and indications of market weakness in my new Market Health Check tool make me feel that the right side of the line is to be short.

With the Dow closing at 11,320 yesterday you may ask yourself why I don’t have the confidence to back my view with a trade. The answer is simple; the spectre of yet more stimulus from the Fed is looming large once again. Continue reading

10th August 2011 – Taking a break

I’ve woken up this morning and decided to take a break from blogging for the next couple of weeks.

I am feeling surprisingly happy at the last few days. It has given me a real confidence boost. Now I just want to watch how August pans out, while I work on my new plans.

9th August 2011 – A sickening bounce, just sickening

I am writing this blog feeling both despondent and elated.

Let’s just get the negativity out of the way. In the last 5 days I would have made a killing, even though the pace at which this would have happened has certainly shocked me. Shorting the market on Friday’s close, taking profits on Monday morning and then setting an order to open at the Dow’s Primary Value Zone would have been the most perfect series of plays I could ever have dared to dream to make. I would have had great leverage and been in at brilliant points. I would have been squarely on the right side of the line of least resistance.

But I wasn’t…. I guess I just have to continue getting back on my feet and wait for next time.

So here is why I am so happy. The validation of the system is the proof positive I needed for my next move (watch this space!!!).

Just look at the chart below.

 

Please click for full image

In the early hours of this morning, my order to open would have been fired. I would have woken up to see a great profit. I almost certainly would have moved my stops up to lock some in and then just waited to see how the rest of the day went. By the market’s close I would have closed my position and said thank you very much to a 700 point profit. I know I would have done this as this comes straight out of “Reminiscences”. When the beneficiary of a huge windfall, grab it with open arms!

I would now take a break from the market. In fact I would probably go away for a week to clear my head. Such a windfall would have surely clouded my judgement so would have been the best thing to do.

For what it’s worth today’s announcement by the Fed  to keep rates on hold until mid 2013 does not strike me as being that positive a move.

A rushed announcement of QE3 would have been ridiculous and looked panicked. They couldn’t cut rates any further (although the idea they might start printing money and handing it out on street corners has amused me – NOT that I have read this anywhere as it is a ridiculous thought!!!). So in reality this announcement by the Fed tells us two things.

First they have given up on 2012. Second they really are out of options. They have engaged in unprecedented monetary stimulus and this has failed to cure the economy.

This announcement is stealth stimulus. My announcing that rates will be on hold for such a long period of time they have clearly told the market the cost of money will be kept at a record low. This may well give stocks a lift, but I can’t this being anything more than a temporary fix.

This announcement strikes me as being particularly bearish. I would probably plan to go long again at the Dow’s Primary Value Zone, when it is hit, but I would have far less confidence it would be held. Although this is not 2008/09, be under no illusions, the situation is extremely serious.

8th August 2011 – Some technical analysis of the Dow and a short term change in focus.

I’m a little late in producing this blog, but the last few days have been exceptional (again!!!). Had I had money I would have shorted the market on Friday night as panic has gripped markets globally.

I would have cashed in my position this morning and would now sit and wait for the Dow to hit its Primary Value Zone at 10463:10476. As incredible as it may seem, but it looks like this is going to happen in the coming weeks. There may well be relief rallies, but we are in touching distance of hitting the value zone, which has been honoured twice in this bull market. This strikes me as the clearest point where the market is likely to find its feet, but in this climate anything is possible!

The chart below is a screengrab from the trial system I have operational at the moment. Although the data is from the Dow’s ETF, this is a good enough proxy for the index itself.

Please click image for full version

  

I don’t have candle stick functionality on my trial system, but the Secondary Value Zone (the red line) did provide support to the market about a month ago. However the clear failure to break a new high, coupled with the bearish Dow Theory signal fired indicated that if this line was broken then the next move would be significantly lower. This is exactly what has happened, but I would never have anticipated the pace at which this has been the case.

Now though I have to move my focus.

The market has been extremely wild, so trying to short it seems a fool’s errand to me. As counter-intuitive as it might sound, I would far rather look for a point to go long. As mentioned the Dow’s Primary Value Zone (the light blue line) has been honoured twice in the bull market. If the plummet of stocks is going to stop this side of 10,000 then this looks like the point to me.

Although I would have absolutely no intention of staying long for too long it would be foolish not to buy when the Dow gets to this level. I really am starting to hate being poor!!!!!

7th August 2011 – American consumer debt accelerates

With all the focus on sovereign debt, one other item caught my attention today. Apparently American consumer debt has risen at its fastest pace in 4 years.

I have written about this issue before and is something I am trying to follow closely. American consumers owe about $2.45trillion and the British about $1trillion. These figures exclude mortgages and home-owner loans!!!!

No serious attempt has been made to get to grips with this situation. As inflation rises and people’s wages drop consumer debt is yet another major threat to our economies. Quite simply people have borrowed too much and this has fuelled “growth” for too long.

I have written before that I hoped homeowners have taken the opportunity to pay down debt, as interest rates have been kept at such low levels. It looks like this hope has been in vain.

I have lost count of the number of times I have read articles, claiming that borrowing is the sign of a healthy economy. This always frustrates me. Borrowing is the fatal weakness of our economy. The financial sector is a corruption of self-interest and deceit. The opportunity for reform was lost in 2008 and the system remains broken, even if it appears to be “recovering”.

How can a recent increase in borrowing be seen as anything other than a move of desperation as people scramble to meet their monthly expenditure in such uncertain times?

7th August 2011 – Europe’s turn to whack markets and the illusive global solution

Well this is turning into quite a busy weekend for events. When agreement was reached on the Debt Ceiling the expected rally turned into a rout. After Friday’s late downgrade of the US by S&P, the last thing markets need is for further discord in Europe.

Now the European Sovereign Debt Crisis has given up on Greece, forgotten about Portugal and Ireland, skipped Spain and has now turned its glare on Italy. Apparently the European Central Bank is holding emergency talks today about whether or not it should start purchasing Italian debt in an effort to calm markets.

What a great plan! It worked so well in the case of Greece….

Apart from the obvious stupidity of this idea I cannot see how the Germans will possibly countenance such a move. Italian debt stands at 120% of GDP, which is a paltry 0.25%. Unless Italy experiences a miraculous spurt in growth, it is very hard to see how the Italians are going to avoid default. The market clearly believes this will be the outcome, now that Italian borrowing costs are >6%, which is apparently the definition of unsustainability.

The Italian economy is 4 times as big as Greece’s. Italy is a member of the G8, so a default will be extremely serious.

With Europe looking like it is on the brink and America unable to reach agreement, the situation looks extremely bad. What is even worse is that none of our leaders seem able to present a plan to solve any of these issues. Perhaps the problems are just too big. Perhaps failure needs to happen so reconstruction can begin.

I had started this weekend thinking the sell-off might just be a correction, albeit a substantial one. Monetary stimulus is still a powerful support for this market. Yet the structural fault lines running through the developed world continue to grow and weaken. I expect my focus in my blog in the coming months will be to plan my next campaign.

6th August 2011 – A sea change

Markets are a function of liquidity and faith. The cornerstone of this construct for the last 100 years has been the impregnability of US Treasuries. Come what may, this asset class is expected always to pay on time.

Last night’s downgrade by S&P of the US from AAA to AA+ is the first time this as happened since the country was awarded AAA in 1917.

If we doubted it before, we surely can’t any longer; we live in the era of financial uncertainty. Preconceptions and existing economic models can no longer be relied on to guide us through what is about to come. This is such an exciting time to live!

However before I get too dramatic, last night’s downgrade does not mean the US is likely to default (at least anytime soon). It does mean that US borrowing costs will rise slightly, but when compared to the $14.3trillion deficit, this is not so significant. It is true that increased borrowing costs will filter through to average Americans through the loans they take on. This will add some further pressure on demand. However the world is not about to end, but the selling next week might well lead us to fear it might!!!

It is probable that this event will have an extremely detrimental impact on fragile economic confidence. The general population is not likely to react well to this news. Whether or not this pushes the US back into recession is anyone’s guess. QE3 is probably a certainty now, but I doubt this will really soothe fears. It might even run into serious opposition.

But there might be some positive actions to come out of this news.

Last week’s Grand Fudge on the Debt Ceiling was greeted extremely poorly by the market. No-one really believes it is a proper solution. The selling was almost certainly in anticipation of a downgrade. If it gets as bad as I believe it could then this is going to turn into an even more serious political issue. Continue reading

5th August 2011 – Panic grips, while I learn valuable lessons and what this all means

Well that was some sell-off yesterday. For the record I got stopped out of my positions and have ended up making a small loss. I am annoyed about this, but what I am most upset at some fundamental errors I’ve made in recent weeks. Apologies if this doesn’t make interesting reading, but this blog is primarily to help my trading!

OK so here goes

As I said in a recent post, I allowed my head to be turned. I had a strong view that a correction was due. My analysis had concluded that the price action in stocks was weak, indices were failing to make new highs, a correction had not occurred in a year, there were serious concerns about sovereign default and I didn’t believe in “recovery” as the data just didn’t support it.

I still believe my assessment about earnings is correct; namely they are not a product of “recovery”, but rather monetary stimulus. This still has implications for my next market strategy, but more on this later.

However I allowed my actions to be guided by others. Buying at support wasn’t a bad idea in itself, but I had allowed my outlook to be moved. I didn’t have enough money to be able to have gone short with any confidence (considering the volatility), though this is not the point.

I expect this lesson will have taught me to have the courage of my convictions.

What I am most disappointed in, is that I didn’t quickly follow up some research I mentioned a few weeks ago. You may remember that I wrote that I needed to do some Dow Theory analysis.

  Continue reading

3rd August 2011 – Has my head been turned?

I had a clear view on the market, which led to my fake short position. Had my fake position been real I would have closed it on Friday, ahead of a Debt Ceiling deal.

Based on the panicked selling of this week I wonder if this would turn out to have been a mistake. The fear of sovereign collapse, which has been surprisingly absent from markets, has now gripped with a vengeance and we are seeing the worst sell-off in 2 years.

Did I look too hard for reasons why I might have been wrong?

At the moment, I don’t know. I will just have to wait and see now. I would be sitting on a very handsome profit, but if the Dow breaks in the next few days, it could well go back to 10,000 and I wouldn’t be in.

Back in the real world, my long oil and Dow positions both got stopped out on Monday, but I had trailed them up with the market, so was able to lock in a small profit. I am happy with how I traded this event, especially given my financial position, but I do want to be on the right side of the next big move.

The next few days look to be very important.

The Dow’s Secondary Value Zone is at about 11795:11807. This is roughly 200 points from yesterday’s close. If the Dow pulls back to this level, then I am going to consider going long. This value zone has been validated before and I now appreciate how little earnings have had to do with “recovery”. However there is a risk that I am underestimating the fear that has now seemed to grip markets.

With this in mind, if I do go long, I will have extremely tight stops. I am fairly comfortable with this decision as the Secondary Value Zone is significant, even more so given that it has been validated already. Also on Friday the next US payrolls number is out. If this is in line with the market expectation of 100,000 then the short term pressure could be relieved.

If there is another nasty shock then the selling could get even worse. With Italy now looking in trouble, there are certainly the forces out there to push stocks right down.