technical analysis


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TLT_20131108

The inverse head and shoulders/double bottom massive pattern in TLT that was mentioned in a post two weeks ago failed spectacularly with the last blow delivered on Friday when 10-Year Note yields rose 5.4%, 14 basis points in one day. This failure must be added to a long streak of chart pattern failures of the last few years that have caused significant losses to those relying on noise trading methods.

After a short break above the trendline that confirmed the pattern according to classical chart analysis, TLT prices plunged literally below the right shoulder and towards support at the double head of the massive complex inverse head and shoulders/double bottom formation.

This marks another spectacular failure of chart trading. Seems like the conclusions in the paper “Noise Trading and Illusory Correlations in U.S. Equity Markets“, by Jennifer Bender et al. is correct and only those with a cognitive bias trade these formations.

A couple of technical charts, and some thoughts.

Now the thing with “triangles” is this: the mid-triangle breaks, up or down, are “usually” the stronger moves. When the break comes at the apex, the move is “usually” weaker, or, a fakeout move. This pearl of knowledge comes from a variety of technical authors on the subject of triangles, particularly these non-specific triangles.

There are two reasons why I think the breakout will be higher. First of all, technical analysis isn’t cut and dry. Often times, we see temporary penetration of boundaries before prices officially resolve themselves towards the opposite direction. In this case, we saw a brief breakdown of support last week before quickly recovering. This is a sign to me of positive things to come.

Agreed, technicals, particularly in this event led market, is simply a risk management tool for short/intermediate term trades. It most certainly is not a prognosticator with any reliable outcomes. Simply, choose a position, long/short, and be prepared to change your mind if it becomes necessary.

And secondly, I’ve been watching the leaders of this bull market that began off those October lows last year – the Small-Caps. Look at a similar chart of the small-cap russell2000 already breaking out above the declining trendlines from the spring highs. More clues of higher S&P500 prices:

Who leads whom? Are small caps breaking out in leadership style, as the author suggests? Or, are they breaking out in anticipation? Who really knows. I certainly wouldn’t become wed to either idea, either could be right or wrong. Once again, simply use the data as a risk management device to take a position.

Is the economy fixed? Not even close. Does that mean stock markets will decline? No. Markets will fluctuate for all manner of reasons, even more so, and violently in bear markets, which, we are likely still in. The breakout higher could eventuate, and/or breakdown, no-one will really know until after the fact.

Take a longer time frame to place positions. It reduces the risk assumed, allows greater space and time for making decisions, especially if there is no requirement to trade the short time frames.

Through the years I’ve had none to not much luck with this chart pattern. I keep looking at it however as it is so damn popular. However the market currently has a nasty feel to it. Earnings are being ignored, no big surprise there, as I have previously discussed it was all about forecasts going forward, or guidance.

Europe is a mess. The new politicians are as stupid as the outgoing, and quite honestly this crowd of fuckwits make the US government look like a pack of high IQ overachievers. So I’m watching the H&S. A collapse would make me significant profits, so go for it chap’s.

Around blogoland you can see the Head & Shoulders analysis starting to make the rounds for an intermediate, or even a resumption of the bear market. Now I don’t have any issues with a bear market, as this bull rally is cyclical, not secular. However, the Head & Shoulders pattern is one that I have seen fail over and over. There is no way that I would base a trade on this pattern, particularly in that currently, the break in the neckline are based on intra-day prices.

There was a time long ago (10 years ago) in a place long forgotten (a trading pit) when the intraday violation of a significant chart pattern boundary line was an important event. No longer!

[Note: This post is intended for classical chartists who are position or swing traders and who consider momentum as a factor to enter a trade. All others, read at your own risk.]

Three factors have combined to increase the magnitude and nature of price volatility to the point where intraday pattern completion is no longer valid.

First, HFT trading now represents as much as 60% of the volume in some futures markets on some days. The practical function of HFT trading is to cascade stops. HFT algorithms are built to leverage resting or probable order flow into a wider bid/offer spread.

Second, and related to the first, the electronic exchanges have replaced pit exchanges. Us old timers once could have resting orders in place, but held secretly by a trusted pit broker. Now all resting orders are stacked for the world (and HFTs) to see and exploit.

Third, the absolute price levels of most commodities (and stocks) are such that the value per futures contract (or share price) swings wildly. I remember entire years when the trading range for Copper was equal to single day trading ranges now. This makes resting stop orders prey for being picked off.

Joe Granville: didn’t he turn ‘bearish’ in 1982, remain bearish for about 14yrs in the face of the ‘great secular bull’ market? In this article, RR talks a lot about ‘why’, not so much with regard as to what his analysis actually says. Both analysts seem to be falling into the ‘prediction’ camp. Always dangerous. Tremendously fun should you actually be right, but not much use if you are wrong.

“I talked with my good friend, Joe Granville, over the weekend, and Joe is as bearish as I’ve ever seen or heard him, based on his OBV volume figures. This checks with my own work and studies.

While fundamentalists scour the news for indications of bullish news, the internals of the stock market continue to deteriorate. Even the action of the stock market is bearish as the market rallies on dull volume but declines on higher volume. Furthermore, rising breadth is narrow on rallies while declining breadth is broad when the market heads down.

I don’t know what more I can do or say to convinced subscribers that we are seeing the resumption of the bear market. This means that we should be OUT of all stocks. As for gold mining stocks, this is a personal choice. In due time, I expect gold to fully express itself with a huge upside blow-off. At that time I expect gold mining stocks to follow, but between now and then gold mining shares will probably be hit like every thing else by the fury of the bear market.

I should add that I am expecting this bear market to be far worse than most people expect or are prepared for. The fact is that I don’t believe that Americans expect any thing more than a temporary spate of difficult times, an annoying patch that should be over in a year or so. This is not what I am expecting or predicting.

Once the Dow breaks under 10,000, I believe that the analysts and the PUBLIC will become frightened and start to cut back on their buying. The newspapers will halt their bullish stance, and a great stillness will envelope that land. That stillness will be the result of shock as it dawns on Americans that they are seeing something far different than what they were expecting.

By the way, the Dow is now trading below its 200-day moving average, which stands at 11,938. The 50-day MA is bearishly below the 200-day MA (50-day is 11,811).

Spiritual — While in rehab and after my hip operation I had a lot of time to think. And I wondered why I was still alive. I had survived combat in World War II. I had survived two heart attacks and a stroke. I had survived a mastoid infection and operation. I had survived 50 years of riding motorcycles with one dangerous crash. I had survived two divorces. I have survived (and believe me it was survival) a severely autistic daughter who almost drove me mad. I have survived the years, since I will be 88 (the Chinese lucky number is 8).

So why, I ask myself, am I still here with my brain still functioning. My conclusion, arrived at after a lot of hard thinking, is that I’m supposed to be the messenger of changing times. I have 8,034 subscribers. What percentage of these ladies and gentlemen take me seriously and follow my advice, and what percentage of this group think I am a self-opinionated loonie I don’t know.

In other words, some body wants me to hang around. I know this based on e-mails and kind letters I have received from many subscribers. My advice over the years on gold and various bull and bear markets has resulted in changing some lives for the better. Which is a source of great satisfaction to me.

So that’s my story. I’m afraid it may sound prideful or mystical, but it is what I think, and when a man is 87 years old, he’s long past the need or the desire to lie. “

From this chappie,

I hate to be the turkey of the day/month/year, but we are in a bear market. The only question is how low will this turkey go?

I am a chartist. I deal in chart patterns. I deal in possibilities, not probabilities and certainly not in certainties. I can only state what a chart is telling me by its geometric construction — and geometric patterns, even when clearly identified, are subject to failure.

The founders of classical charting (Schabacker, Edwards, Magee) identified something called a 3-fan principle. The 3-fan principle specifies that a corrective rally may be defined by trendlines with decreasing angles of attack. The concept also specifies that the violation of the third fan line establishes the top of the corrective rally — and that the subsequent decline will retrace the entire distance of the corrective rally.

Next, let’s move from a 30,000-foot view to a perspective from the space station. Should the implications of the 3-fan principle be realized, something very, very, very (do I need to repeat the word “very” again?) significant would become apparent to a chartist.

A move back to the 2009 low on the quarterly semi-log chart sets up the possibility (not probability, not certainty) of a 13-year H&S top whereby the entire advance from the March 2009 low is nothing more than the right shoulder of this massive configuration.

Now while 2009 isn’t far enough away in historical terms, the reason that this ‘chart’ based analysis is invalid is for the following reason:

n 1939, International Business Machines Corp. was removed from the average and replaced by AT&T. That was a fateful move. Over the next 40 years, before IBM was restored to the Dow in 1979, AT&T, largely a regulated utility, saw its share price increase about threefold. IBM, on the other hand, greatly expanded during the war and then moved into the soaring computer industry. Its stock increased about 22,000 percent between 1939 and 1979, one of the great investment success stories in Wall Street history.

Had Dow Jones just left well enough alone and stuck with IBM, the whole history of the average — and thus the perceived history of Wall Street in the postwar years — would have been different. The Dow would have recovered to its 1929 peak years sooner than it did, and marked many other milestones, such as reaching 1,000 points, earlier as well.

It’s a beautiful example of how statistical tools, valuable as they are, can both determine and distort our view of history.

The stock indexes are flashing a sell signal of significant magnitude. The weekly SPX chart shows that the market completed a 7-month H&S top and penetrated a 3-fan principle in early August. The rally from the Aug./Oct. low has now kissed the neckline and retested the fan line. The daily chart of the S&Ps displays a small symmetrical triangle.

This is of course the problem with technicals. How is that call made? The market has been recently lower, it’s tested the lower ranges many times. All the lows held. Now the market has moved higher, yes it’s pulled back from the ‘resistance’ point back to the top of the previous range, where we are currently. So how is that ‘bearish’?

From this post

Now remember, this is not a fundamental story at all. I don’t really care about Europe or double-dip recessions or who our president is or isn’t. All we’re talking about here is that resistance above us keeps getting hit. Price action is pure. We know that there are sellers just under $60 — this has been proven all year. So let’s use some logic for a minute: If there were sellers here in February and there were sellers again here in May, and again in July, simple math tells us that less and less market participants are willing to sell here. Why? Because they’ve already sold. The point is that as more and more sellers willing to sell have already sold, eventually everyone willing to sell has already sold. What happens then? Nothing but buyers are left. The result is what we call, “a breakout”.

There are two scenarios that invalidate this ‘logic’ and therefore invalidate the statement or proposition.

[i] Those that purchased lower than $60 now ‘sell’ to lock-in their profits.
[ii] New ‘short sellers’ initiate new positions.

Both scenarios can invalidate the claimed reduction in absolute numbers of individuals wanting to sell.

The 75ma is the key. Certainly on the chart provided it looks the bee’s knees. Maybe it will continue to work its magic. If so, then maybe the longs will start to lighten-up around the resistance?

Then again, maybe not. Trading to technical indicators, particularly moving averages, can be a way forward I guess, certainly everyone watches them, it is compulsive viewing for market participants. This is of course the problem, sometimes they work like a charm, and at other times they fail miserably.

The monster mo-mo stock of the last couple of years. If you’re wanting to buy it, and I’m not interested, then hang on a while and see if you can pick it up around the 200ma at the $95′ish mark. At some point the short-sellers will be covering to take profits, if you can time that turnaround, I think the volatility will be profitable.

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