21.3 C
New York
Saturday, September 24, 2022


Which Way Wednesday – Pattern Recognition Special

Head and shoulders, knees and toes.

Sorry, I can’t think head and shoulders without adding the second part thanks to the darned Wiggles, which my kids were raised on – better than Barney, at least…   The head and shoulders investors care about is the chart pattern (from the Chart Store) and, frankly, I could make a knees and toes case by extrapolating the left side of this disaster (which was actually a great bull run but would not be as much fun if we flip it). 

TA is all about symmetry and pattern recognition, two things that are hard-wired into the pleasure center of the animal brain to help us develop cognitive skills early in life.  Humans love finding patterns – it makes us happy.  In this particular case, the fact that stocks go up and down and then get overbought and then get oversold as they correct to the mean has been cleverly identified by one primate (and I hope he gets a copyright fee) as a "head and shoulders" pattern and all the other media primates gather around the great obelisk and they howl and shriek at you every day and they cast their bones and make proclamatiotion as to what it foretells

Unfortunately, Technical Analysis has so many devout followers that it often becomes a self-fulfilling prophesy.  Even worse (and certainly more significant) than the head and shoulders pattern is the coincident "death cross" or "dark cross" that is being formed on our indexes (see yesterday’s post) as the 50-day moving average falls below the 200-day moving average, as indicated on this chart from Barry Ritholtz:

Mary Ann Bartels, Chief Bone-Caster at BAC, made the follwing prediction about the pattern she was seeing:

June 23, 2010 marked the 1-year anniversary of last June’s bullish Golden Cross of the 50-day moving average above the 200-day moving average. This Golden Cross signal preceded a 12-month return of 22.4% on the S&P 500. The average 12-month return for the 42 Golden Crosses that have occurred since 1928 is 9.6%. More importantly, the June 23, 2009 signal occurred during the NBER recession that began in December 2007 and Golden Crosses associated with recessions show a much stronger average 12-month return of 19.5%. The average 12-month return for the S&P 500 over the same period is 7.2%…

The bearish counterpart of the Golden Cross is called a Dark Cross. This signal occurs when the 50-day moving average crosses below the 200-day moving average. For the S&P 500, Dark Crosses are not all that bearish. The 42 Dark Cross signals that have occurred since 1928 have generated an average 12-month return of 2.4% for the S&P 500 vs. the average S&P 12-month return of 7.2%….  The current trading range on the S&P 500, which began in 2000, has seen two of these more bearish signals – one in 2000 and the other in 2007.

So, not really that bad is it?  Yet you will hear the talking heads on the media tell you this is DOOMSDAY and all of the lower primates (yes, you Cramer!), who make their bananas by jumping up and down and acting like monkeys on television, are screeching to their followers that things are much worse than they seem.  Ignore that positive, scientific "data" that shows slow, steady improvement, they say, better we should follow the old ways and react out of frear and ignorance

In fact monkey-boy Cramer was so over the top with his doom and gloom yesterday that CNBC removed the clips of him saying (with the Dow Down 238 points already yesterday afternoon) that the market is "still overvalued" and "deserves to go down."  Cramer even went so far as to say (at 5:15 on this MSN video, which you can watch until it’s removed as well) at 2:50 yesterday that: "I don’t want to be there until 3:40, because we know the double X and triple X programs come in – they have to rebalance.  The SEC said they wouldn’t affect the market.  The SEC never saw a thin market like this.  All the research was done during the Bush years, when anything went.  So you know you have to keep your powder dry until 3:40, when they come in and jam the market down 200 to 300 points.  That’s what happens when we’re down 250 now, we’ll be down 500 at the end of the day.  I mean that’s the way these programs work… This market is too high."

That’s the message investors are getting on the #1 Financial Network.  Kind of hard for the market to get traction when the top monkey comes on TV an hour before the close and tells viewers that the day’s horrific drop will double up into the close because of forces only he (and not the blundering SEC) understands.  You can call it fear mongering, you can call it blatant market manipulation by a many who has said the market is heading lower for a month now and is anxious to make himself correct or you can just call it criminal but I call it just another day at CNBC, which has taken the art of market control to a high art form. 

The great manipulators know when to apply the pressure.  If you know there is about to be an earthquake or an eclipse, you can really impress the natives by banging your staff on the ground or making some gesture along with your prediction and, if it works out – you can then proclaim "behold my power" and the masses will worship you or, if your prediction doesn’t pan out, you can have GE/CNBC redact your statement from their web site and move on as if it never happened (and I challenge you to find this clip or mention of it anywhere on CNBC.com).  Better luck next time, I guess.  

You can get more on my own take on predictions here, from my 2007 outlook.  My 2010 outlook is still in play but, so far, so accurate as we close out the first half of the year with the rich getting richer and the poor still getting poorer. 

Today we got a very disappointing ADP report, the kind that should make Cramer seem like a genius but we’re already down at what I expect to be a firm bottom and this week’s weak data will surely test it.  We have Unemployment tomorrow with the usual 450,000 jobs lost and some terrible Construction Spending numbers (-1%) and a weak ISM Index (59) and awful Pending Home Sales (-12%) and probably weak Auto Sales too (barely 9M units) as gas prices shot up and trucks still outsell cars 5:4 in this insane country. 

Friday is the Big Kahuna – Non-Farm Payrolls and those are now whispered to be off by 145,000 at a 9.8% unemployment week with flat hourly earnings and a flat workweek – all rotten signs and then we get Factory Orders at 10am tomorrow and those are probably off a point!  So our goal for the week is to survive – if we can pull that off, then the tale will be told by earnings, right after the holdiday weekend but, meanwhile, we’re buying what the Cramerites are selling



Notify of
Inline Feedbacks
View all comments

watching to see if minis (/YM & /ES) close lower before they open for the asian markets

Phil/DBA.  What do you think of a boring, but dependable DBA buy/write?  It never moves, yet you can still make over $3 in 6 months for Jan puts/calls and never look at it again.  Just looking for something productive to do with all the cash in my IRA.

Phil: have closed callers55 and wait to sell jan50, also rolled jan calls 35 to 30. Spread is then 30/50.

I’m thinking Cap needs to share his info with us more often 🙂

on /HG and /CL: reason why they didn’t close at the lows of the day was maybe ‘coz the dollar barely nudged? 

TBT not breaking $35.50 – interest rates can go only so low..

gel1 – EW was up 4% today in a  really awful market. Any news ? I couldn’t find any announcements.

I’m hurting on a few artificial buy write spreads on TBT, along with a $47 September I sold a few months ago, that I have rolled down to 2x the Sept $43 puts.  I’m short a total of 5 put contracts.  The new margin requirements on triple ETF’s has drastically affected my available buying power, and I’m starting to think it may be better to just close my various TBT positions, at a significant losses, and just do a buy/write on BA or something similar that looks like it will pay close to 60% in 18 months (Assuming BA holds $60), making up for my loss in TBT, with less than half the margin requirement.
I’m in 4 $34/40 Jan 2011 Bull spreads, and short 4 $34 2011 puts to to reduce the basis on the bull spread.  This along with the 2 September $43 puts, has a margin requirement of $10,000 on my $30,000 account.  My loss in TBT according to TOS is about $2,400.  I foolishly got way too aggressive with these positions, and TBT is way too big of a portion of my portfolio, and I’m eager to put this mistake behind me.

 I rarely play the commodities other than for a day trade.  Too scared to hold without watching it closely.  And when I do play the commodities, I play the minis.  For those interested:
/YG: Gold Minis
/QC: Mini Copper
/QM: Crude oil minis
/QG: Nat Gas minis
And for those just starting out, know when those inventory reports come out!!  I was lucky enough to have played /QG when the report was in my favor.  And I had 3 contracts too!  Almost had a heart attack seconds before reports were announce when those candlesticks just went crazy.

  I don’t know who owns DNDN here.  Tanking in the AH.  anyone know why?

No shorting TNA – guess you are pumping up your retirement account.
IB will let any idiot (me) trade just about anything they want – no issue shortingTNA.

Commodities: too volatile to put in stops that I can tolerate hence having to watch it.
DNDN: Optrader site says rumor has has it Medicare not covering prostate cancer drug.  with the cost of treatment and medicare’s balance sheet, i can’t blame them.

Copper: Could possibly be lagging the market–massive h&s forming too.  don’t you just love those patterns=)

 Unless the markets totally melt down I doubt $155 AAPL. I have been down on them as a warning based on my knowledge of their real problems. I still believe they ran into supply problems with the iphone and ipad as a way to avoid huge losses. This is not a dumb co. They also only produced what they knew would disappear. They are really in a safe position as how many owners will hire a lawyer at $3,000 to sue for a maybe $1,000 and they protect themself from all this by replaceing the units. They met deadline promisses more or less and sold every unit, BUY THAT GUY A CASE OF SCOTCH!

samz / shorting TNA
There are ussually no shares available. My accounts are not IRA’s.

 on AAPL–if you think 155 is low–how bout this?
if Elliot Wave peeps have their way with markets going to go below 09 lows, i can see this happening.  Full disclosure, I’ve been short AAPL(with Aug puts) since it was trading at 272.  I sold 1/2 at close of day and sold July P to reduce delta.
Elliot Wave piece:

I just want to point out that if the head and shoulders pattern REALLY IS TRUE, then we’re looking to head to 861 on the S&P 500 and 8206 on the Dow.  I calculated these levels by subtracting the difference between the "head" and "neckline" from the neckline level.  I don’t know if I really subscribe to all of these chart patterns 100%, but none the less, its still interesting to note.

Why looking from oil firms only XOM, TOT testing 2 years lows and pay 6% dividends.  I thing for long time investors sounds good.

 Hi Phil,
DNDN now at 25. Buy here or wait for tomorrow morning for an options play instead?

 DNDN, message boards are alive with some medicare news. I agree it’s a good bounce play.

 i’m not going to rush. i think i’ll play this with options tomorrow morning

Dendreon Corp Weakness attributed to CMS post describing the opening of a national coverage analysis on the Provenge autologous cellular immunotherapy
– CMS received informal inquiries for a national coverage determination (NCD) for autologous cellular immunotherapy treatment of prostate cancer. This interest arose upon the recent FDA approval of the Sipuleucel T treatment regimen, marketed as Provenge.
– CMS :"We are opening this national coverage analysis to determine whether or not autologous cellular immunotherapy is reasonable and necessary under sections 1862(a)(1)(A) and/or 1862(a)(1)(E) of the Social Security Act."

Phil, what you think, its stupid or not, I make little HERO play this week, buy stock at av. 2,5 and sell oct.2,5 calls 0.45 with 18% down protection, if hold 2.5 then 22% 3,5 month?

I have not seen any news on this one… It looks even better, since the overall market is so damn weak.

Phil – what do you think about doing a buy/write strategy on DO at this point.  I see they pay dividends ranging from $1.5 to $2, three times a year as an additional bonus…  I was thinking picking up the DO stock and selling at – or – slightly out of the money calls… rolling them monthly…

  – OR – just selling the Jan 12 calls and sitting on them.  Add in the dividend (assuming $6/yr) and I’m coming up w/ a 20% annual return.

Phil- At 11:19 you posted
XOM/Fab – If they buy BP they can go to $40 but I’m happy to own them for $57 or even $60, even if they do buy BP.  With XOM, if you sell the 2012 $57.50 puts for $9.20, you have a 1x net $48.30 entry.  If they head lower, you can buy stock at $45 and sell 2012 $45 calls for $7.50 (guessing) and that would put you in at net $28.30/42.90 with the stock at $45.  So, if you plan your moves in advance, it’s much easier to decide if you have a good entry, right? 
I can follow the logic of this trade pretty well, but if XOM heads lower, what about the short 2012 $57.50 put? At XOM $45.00 wouldn’t you have a debit of approximately  $12.50  to add into the calculation? I may be missing something here… Thanks.

What a turn around AAPL has problems and they have to address that, but what is this situation, I am thinking they will fix this and when the price falls to the bottom we will ride them up again. For investors this is only a change and opertunity.

Gel1 – Thanks Gel. I agree and will wait for a little pullback here for a buy write.

The amount of risk the stock market poses is not static. When you select a portfolio that represents a certain amount of risk which should be in line with your risk tolerance, you must be very careful. Why? Because the external forces that move the market are constantly changing, resulting in varying amounts of pressure on the market to move either up or down.

Currently, the pressure that is mounting is putting great downward pressure on the U.S. stock market.

One may say, "Well, I’m quite risk tolerant; and if the market goes down like it did in 2007, I can ride it out and I’ll be okay." This position would have to assume that the market would recover to the previous levels of today in a reasonable timeframe of, let’s say, a few years.

Now, let me show you why I believe people in the market today are taking on a lot more risk than they realize.

First, remember that back in October 2007, prior to the most recent market meltdown, the Dow was at 14,000 points. If today, during the summer of 2010, represents the near pinnacle of the current recovery, then you still would have nowhere near the amount of investable assets your accounts represented in 2007 for several reasons, the most obvious being that the Dow is not at 14,000 points but at 10,000.

Second, when the market drops by 50 percent on your $100,000, taking it to $50,000, you need not a 50 percent gain but a 100 percent gain just to break even. For both of these reasons, you are not at your 2007 levels now. But let’s consider another phenomenon of which you may not have thought.

When bubbles burst like the real estate market and stock markets did in 2007, they don’t re-inflate to their previous levels for a long period of time — typically 20 years or longer. Consider Japan, whose own stock index, the Nikkei, sat at 38,000 points in 1990 and today, 20 years later, is still at 10,000 points. Do you think risk-tolerant Japanese investors who said, "I can stand large corrections should they occur; and I can even wait a long time to recover" had in mind that 20 years later they may still be worth only one-third of their 1990 account values?

Bill Gross, CEO of PIMCO, one of the world’s largest bond fund managers, has said history was made in October 2007 when the stock market fell, because we may never again in our lifetimes see a Dow of 14,000 points. Why? Bubbles burst for a reason and don’t re-inflate for a very long time. The stock market bubble burst in 1929, ushering in the Great Depression, and investors were not made whole as a result of the market’s losses until 1954, 25 years later. I’m sure that when risk tolerance was explained to investors in 1928, they had no idea of the level of risk they were exposing their life savings to at the time, which was also true in Japan in 1989.

Mr. Gross has gone on to say that we are now living in the beginnings of a "new normal" — an extended period where prices are falling in a process of deleveraging and will not recover to previous levels. Instead, they will find a new normal that is supportable by a slower aging economy.

Remember that the Dow was at 14,000 points just over three years ago. Today, it’s at 10,000. As we continue to adjust to the new normal, there are additional bubbles that have not yet burst that, upon doing so, will cause the market to drop further. Not just drop lower, but also stay lower for many years to come. I believe that if you are in your 50s or older, you cannot afford to ride the market down this time, because it’s not coming back.

The bubbles that have yet to burst are the following: bond bubble, dollar bubble, U.S. Government debt bubble and, eventually, a gold bubble.

When these bubbles burst, the Dow will fall to a new normal. That new sustainable level may be between 5,000 and 7,000. When the market has greater downward pressure and our country’s financial woes and demographics work to keep it down, then the most critical strategy quickly becomes to protect what you already have while our nation and economy deleverages and adjusts to the new normal.

We’ve been taught that over periods of 10 years or more, the market always goes up. Well, if that were ever true, it no longer is. Consider the Dow, which stood at 7,487 on November 13, 1997, and then was again at 7,486 on March 18, 2009, almost 12 years later.

To discover one of the reasons the stock market bubble will not re-inflate to 14,000 is to consider what pushed it there to begin with. The 77-million-strong baby boomers were in their prime spending years in the 1990s, on a spending spree the likes our country had never before experienced. All that demand created a supply shortage in housing and allowed companies of all types to raise prices, thus, driving our markets higher. Seventy percent of our GDP is made up of consumer spending. Now, here we are in 2010, and the baby boomers are 20 years older. They are past their peak spending years. They are downsizing empty nesters that are fearful about their future and savings like never before.

There isn’t another baby boom generation that’s waiting in the wings ready to buy, buy, buy to help re-inflate the bursting bubbles of real estate and the stock market by driving prices up. When you recognize we are now in the new normal — which is still adjusting to new lower pricing — then you will realize the next time the market declines, it’s not only not coming back to its current levels quickly, it may not come back in our lifetime. That adds up to risk that many do not realize they are taking.

From this morning on corporate relocation overseas.  Here is a quote from Obama after the election "There is a building in Bermuda [don’t remember if it was Bermuda or some other foreign country] that is  home to 10,000 American corporations.  It is either the biggest building in the world, or the biggest tax scam in the world, and we know which it is."   At least Obama talked about the issue.  Did you hear any of this from Bush 2?  No, we heard how strong the economy was every month or so.  At the time I said, "Really Mr. President.  We don’t make anything here anymore.  Instead, we buy cheap throw away stuff from China.  We have no savings. We are broke, a problem that you have added to greatly by doubling the deficit in a few years and you did this during a time that the economy was expanding." 
It’s the threat of corporate relocation that keeps global corporate taxes so low – companies are so rich and powerful that they have effectively told our governments to look to the …

You are wise and that is why I am done with investing in even the short near turrm. I have restrained from all advice past Jan 2011 and regret some of that. The only way is cash at the end of the day. I am 100% with you and I do see your Zs enven toughI I have tooooo many loses to ever correct I may very soon go 100% cash every day.

JRW, I’ve known of the aging boomers’ affect on housing prices for some time.  But I hadn’t heard the implication of the slow recovery on the boomers forcing them to ditch the stock market.  That’s what I need to remember about deflation.  Everything goes down.  Thanks- 

Post 3 pm selloff … should’ve seen that coming …. definitely had the feel of a liquidation or forced sellout.

Hey All
I am the ageing boomer and I know what most of my fellows are doing, I can’t even convince my only sister to go another way. Because our parents are 90 she seems to think they will save her even though I could buy all out and I think I am going down the tubes!

JRW, you don’t think as the bond/dollar gets flushed down the toilet the markets would rise?  All hard assets will go up, and stocks will go up with it, at least in new dollar terms.  All that said, looking a few months ahead, difficult to imagine dow below 11000 for the elections this fall.  Phil is 100% right IMO when he talks about relationship between ‘them’ and gov’t.  They are given freedom to manipulate, but at certain times that manipulation has to go in the direction needed for the ‘democracy’.  I think this is gigantic shake down starting from flush crash until now.  Before long we will be complaining that our short positions are manipulated higher like we were 2 short months ago.

I forgot , the mind goes first, My parents who have out lived all their siblings agree with me and push me to SELL my sister and her stupid, dumb husband who has no idea why nobody will not pay him outragious wages to build unwanted  housing even though she has a masters degree and he never finished high school. This is our current problem, nobody thinks they need to change. It will go back to ??????? soon. To them it has to!

Phil / Ddip    Loved your reply to my 2.58pm post, but it didn’t really address my current concern of Ddip.  Your answer addresses the long (maybe very long) term upside for multinationals.  But you side stepped my rationale for the dire growth prospects and the immediate and even medium term impact this will have on mkts.  I’m a greenhorn relative to you in forecasting short term mkt movements, but as I’ve indicated in previous posts I’ve only reluctantly stayed from my 90% net cash postion, while my head has been screaming at me to go heavily short.  I’ve been struggling to understand your bullishness with the 25% invested position, rather than more aggressive shorting.  Which part of my post, which fcts GNP shrinkage, do you disagree with?  You’ve always emphasized that you like to absorb contrarian views.  Also note the very sobering post from JRW which underpins my arguements.

  Good points, & well said.  Of course, a wave of inflation could present the illusion of getting back to 14,000 or wherever, but it’s time to pay the fiddler,  the partys over.
  One of the oldest newsletters Mark Hulbert tracks, can’t remember the name, is based on one simple principle :
when the market’s below it’s 200 day MA, go to cash & wait for it to get back above.   It works.

For those of you that think high inflation will result in Stock Market gains, yes………but

November 14, 1923

German mark worthless (4+ Trillion marks per dollar)
Bank interest rate over 900%
German stock market at 26,890,000 at the peak
The value of the Daimler company was about $980 million and a car cost $3 million – the whole company was only worth 327 of its cars.

You have submitted a terrific piece that is a thesis for caution. The frustration of watching your investments arbitrarily be diminished in value as a result of unknown hazards or intentional manipulation, makes the risk element out of proportion to the potential rewards. My equity portfolio is flat for the year, to date, and it is for the reason there have been three events since January that I experienced 200K down days. These drops were caused by political misteps and foreign events that took down the broad market.  None of these events were of the nature anybody could see coming, and certainly had nothing to do with the basic fundamental well being of the investment choices. The "new normal", as you and  Bill Gross have stated, really must be acknowledged in our investment strategy, and for sure it negates the importance of historical norms that are no longer relevant.  Too often we assume everything reverts back to past values, but not so, as new parameters are in play that were not in existance previously  I have found conventional hedging strategies to be helpful, but not adequate for needed  protection, and therefore I have devised a balance in my portfolio that I refer to "sector hedging", wherein it offers balance to the downward moves brought on by unexpected events, with corresponding upward moves in other areas that act inversely.  My positions in gold are one of these hedges. Given the higher risk levels in equity trading today, as a result of, as you say, the many potential bubbles, I have been concentrating on currency investments, as the markets are far too large to be subject to manipulation, other than by sovereign governments, but their interests can be forcasted with some certainty. It is a market that serves world wide commerce as a purpose, but also is an investment opportunity for those that are better preparred and skilled in their trading expertise. It carries far less risk than the equity markets, and enjoys diversification  as it is spread across the entire world.. Thanks for your very informative post, and a reminder of the sometimes overlooked risks we live with day to day.

Phil – does rolling the following positions make sense?:
FCX JUL $60 ps (bought at $2.50) to AUG $57.5     WMT AUG47.5 ps (bought at $1.03)  1/2 to SEPT, 1/2  poss put to me and then buy write    RIMM SEPT55  (rolled once to $5.55) to JAN12 $37.5 calls and sell $45 p & c’s  WFR OCT12  (bought at $1.52) to JAN12 11 puts and XOM OCT57.5 (bought at $2.15) to NOV55s.

  Hence my use of "illusion" of inflationary wealth.  If we can’t get the real economy on main street going again soon,
I think more  money will be made on the short side of the market than the long.
  What upsets me is this whole mess is OF, BY, & FOR the bankers.  They want to play in this unregulated, 600 trillion dollar fantasy world of their creation, & we have to bail them out !  I say make them eat ALL their bad paper, even if it takes 50 years.  Bypass Wall Street & lend directly to the next tier of regional banks to get money out to the people.
Fiat money is only good when it’s circulating.

hi Peter are you around — please give me some recommendation on SPX and RUT short strangle that you was recomemnd to start — I have 10 positions of 875 August short put with 960/950 vertical put — is this the time to flip to short call now that SPX broke 1040 and not hold into close. same as RUT August short strangle 520 short put — I did not open any short caller yet. THX

Many folks are wondering why the Fed has not started with a tightening policy related to Treasure rates. Our Fed chief is a member of the school that believes in times of contraction, we must continue to expand the money supply. They believe this new money will be injected into the economy, and will encourage commerce because the mind set of the typical American citizen, is to spend what you have, as you receive it.  Having just experienced the reality of a major economic contraction, coupled with unemployment and fear,  the same citizen is backing away from the edge, and stashing some of their resources for a rainy day. This "new norm" to paraphrase JRW, is not allowing the economy to recover at a pace that was anticipated, based upon previous recessions in the past.  I believe the Fed will over expand the money supply this time around, more than what is needed, and is intentional, as they believe inflation is the better of two evils –  one being deflation and economic contraction, the other hyperinflation.  The perceived benefits of hyperinflation, they believe, is the easiest way to pay down the debt that can never be repaid otherwise.  Asset values of every kind – real estate, equities, etc  will be revalued upward to coincide with the new dollar value, however the assets still have the same value, but denominated in cheaper dollars. This coming hyperinflation will result in a major dynamic relating to a massive shift in the ownership of wealth, from those that are invested in fixed income instruments,  to those that are invested in dollar denominated assets. Possibly the best position to be in today, in advance of this massive shift, is to carry debt with a long dated maturity. Hyperinflation is the only possible salvation for the debtors of today, and it will also solve the entire real estate problem, as prices will elevate, thus creating new found equity. Now that is a creative plan eh!

Stay Connected


Latest Articles

Would love your thoughts, please comment.x