Posts Tagged ‘5% Rule’

Testy Tuesday – Fed Pop or Drop?

Isn't this exciting? 

We popped all of our 5% levels yesterday, now all we have to do is hold them and we can start looking ahead to the 10% lines.  Just 10 days ago, on Friday the 10th, we did our last multi-chart study and I said in the morning post: "I am not TA guy but If I were a bear, I’d be pretty darned concerned about the charts as it looks to me like the 20-day moving averages are registering a short-term mistake in a generally rising trend."  Look at how those 20 dma's have snapped up in less than 2 weeks (blue lines are mid-points, green circles are 5% levels):

So Gold and Transports are running away with SOX falling behind.  We've been playing the SOX up with USD, which is up 10% since I picked it in that Friday's post but that's been a relative underperformer for us as we nailed the bottom with a buying frenzy into the late August drop which culminated with my very bullish "September's Dozen" from the 3rd.  There were actually 10 stocks and only 9 fit in the multi-chart (I dropped HMY, who already gained 15%) with way more than a dozen trade ideas for our Members to take advantage of the anticipated short-term moves.  Of the 10, only IRM has been laying around but we weren't expecting a quick move on them and played a conservative April spread and took the risk on Oct $22.50 calls, which are our only loser, down 30% at .20 but I still like them if we break up from here.  

The leverage you can gain with option plays is truly stunning.  On BRCM, for example, the trade idea was a straight purchase of the Sept $32 calls for $1.25, BRCM topped out at $35.49 with the calls close to $3 on the 14th and they expired on Friday at $2.16, which is up 72%, even for people who didn't stop out between there and up 140% that Tuesday.  That trade was a combo trade with the sale of the October $30 puts at .70 and those are down to .30 (up 57%) which are well on their way to expiring worthless for a full 100% gain.  We also took an artificial buy/write that stretched from Jan to Jan 2012
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Tuesday – Uncle Rupert Throws A Tantrum

Happy Tuesday to you!

Nice market take-down by the Journal this morning, who led off with an article questioning the EU stress tests saying: "From this point of view, it is not surprising that the doubts raised about the validity of the stress tests are weighing on the Euro and also on other risk-correlated currencies."  Then, to make sure no one misses the article, they run another headline for the US markets that says "Concerns Over EU Banks Hit Euro" in which they quote themselves:

New concerns about the ability of European banks to weather the financial crisis came after the WSJ story highlighted once again the weaknesses of the stress tests. The report helped to widen the bond spreads on peripheral debtors and knocked European stock markets lower as another wave of euro zone jitters hit the market.

If this seems like BS manipulation to you, you will be doubly insulted to know that the US isn’t even the target of the manipulation.  Mr. Murdoch, an Aussie and long-time foe of the Euro, is simply expressing his displeasure in a Labor Party victory in the Australian elections this weekend (real Democracy’s hold elections on weekends to encourage voting) and is knocking down their dollar by simultaneously boosting both the dollar and the Yen (also in the article is news that the BOJ will not intervene in the Yen, which is total BS) to push down his native currency and make a post-election statement.  Just a media giant throwing a temper tantrum this morning. 

[EUSTRESS]Think about the "nature" of this story.  There is nothing NEW in this NEWs, is there? It’s the kind of article that could be written any time someone wants to push the markets.  Even the data they are using is from back on 3/31 – they didn’t even bother to update their facts for Q2!  Notice that the article is pure worst-case speculation by the WSJ, followed by comments like:

  • An FSA spokeswoman declined to comment.
  • CEBS didn’t disclose that the banks were calculating the figures in that way.

Wow, pretty damning evidence that they couldn’t get a comment contrary to their BS on a holiday weekend, right?  This news is also conveniently drowning out Obama’s proposed 6-year Public Works Program to combat unemployment by committing $50Bn for needed reparis on roads, rails and airport runways – putting some of our nation’s unemployed construction workers back to…
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Worrying Wednesday – Can We Hold Support?

Wheeee - I told you this was going to be fun! 

What a day we had yesterday with the down and the up and the down and the up and now, this morning – down again!  We cashed our directionals on the morning dips yesterday but now our disaster hedges are putting us in a great mood this morning (I mentioned our QID play in yesterday’s post and that was a very easy fill on yesterday’s run-up).  This morning’s action should push QID over goal ($17) and we’ll see what sticks as we test our first line of (hopefully) defense at Dow 10,450 and S&P 1,100.  

If we lose the S&P then the Dow has a quick ride back to 10,200 so we’ll be looking at DXD again for a add-on hedge.  We already have DXD plays and we were just adjusting them on Monday, as some Members were worried that the market was going too far the other way, which led me to comment in Member Chat:

When all you guys start capitulating on your short positions I usually figure that’s a great time to get aggressively short because the end is probably near.  Keep in mind we are trading a range and right now we are at the top of that range so hedges like DXD are going to get stressed.  If you do not need the protection, of course take it off the table but if you do need downside hedges, then a simple roll on the call side can give you a much bigger upside

Range trading is great but you have to BELIEVE in your range.  The bottom of our range, as I posted in yesterday’s Morning Alert to Members, is Dow 10,200, S&P 1,070, Nas 2,200, NYSE 6,800, and Russell 635 and until we fail 3 of those 5, we will continue to make bullish plays when we get near those levels, just as we make our bearish bets as we test our breakout levels.  Even these levels are just 2.5% off our midpoints so we don’t get gung-ho bullish until we hit the full 5% bottom – which is now the rising 50 dmas (red lines) - but we’re kind of losing faith in getting back there so we’re a little more aggressive with our buys now than we were last month. 

What I love about our 5% rule is that, eventually,
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Monday Market Measurement – Just Right?

Welcome to dead center! 

We are finally back to the middle of our predicted trading range.  It's the range that our 5% rule predicted since October of 2008 so we're hardly going to be shocked to be here now.  Usually we are shocked when we're NOT in our range.  I detailed the movement this weekend in our 5% Rule Update, so I won't get into it all here but let's just focus on our short-term chart and embrace the uncertainty as we move back to the middle of our range at 1,100

I say it all the time and I'll say it again:  I'm not bullish or bearish – I'm rangeish.  That means I get more bullish at 5% under our line and I get more bearish at 5% over our line and I get extremely bullish or bearish as we get into that 10% zone because – if the market fundamentals don't change – then my midpoint doesn't change and the opportunity is to play us to return to "reality" at S&P 1,100 (Dow 10,200). 

Just look at those nifty little resistance points we have to watch now – the 200 dma is at 1113 and the 50 dma is at 1,084 and we just ran up from 1,030 (we ignore spikes) past the 5% rule at 1,081, which just so happens to be pretty much the 50 dma so that will be our key test for the week as our bottom to top run from 1,101 to 1,102 is close enough to 10% to merit a 2% (20% of the run) pullback back to, WHOOPS!, 1,080.  So 1,080, 1,080 and 1,080 is our line in the sand for the week.  If the rally is real, the number will hold and, if it doesn't hold (especially with all the earnings and economic data we have coming in) then we have to look at the drop from 1,220 to 1,020 (200 points) and consider the move back to 1,120 nothing more than a strong, 50% bounce back to our mid-range. 

We are past the EU Stress tests but JPM says 54 banks should have failed for the following reasons:

  • Lack of rigour in macroeconomic stresses, leading to low virtual portfolio loss rates
  • Sovereign haircuts were applied only to trading


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Charts From the Future: 5% Rule Update

Yawn!

As I said in our last 5% Rule Update, way back on May 5th, I’m not a big fan of TA.  We have our 5% rule and it serves us well enough but that’s a statistical analysis, not a technical one.  The only TA I put a lot of stock in is Fibonacci Retracements but that, also, is really statistical science and has nothing to do with trying to predict the movement of squiggly lines on a chart

The 5% Rule does NOT tell you which way the market is going.  It does tell you where the resistance points will be.  Of course, knowing that and knowing what kind of bounces to expect and knowing where a proper breakdown or break-out occurs is kind of useful and, when it coincides with the tea leaves that are read by the "real" TA guys – you can really have something good to go by! 

Unfortunately, the 5% Rule is not really a RULE because it requires a cynical background in statistics, especially regarding aberrant values or "outliers" and a general understanding of market history as well as current market events because all need to be taken into account in order to give you accurate "consolidation levels" from which we base out chart movement.

The great Harry Houdini used to enjoy amazing audiences with demonstrations of the supernatural, especially when he would pull back the curtain and reveal the frauds that others were passing off as reality.  That’s how I feel about TA - we can use these very simple scientific "tricks" to project the movement of the market and others can paint their charts and dress them up in whatever language they wish to make it unique but, to me, it still all boils down to the fundamentals with the underlying movement governed by normal regression patterns influenced by capital flows and sentiment. 

Whatever you want to call it, here’s our chart from May 5th, where I said: "So what lies ahead?  Most likely a retrace back to 1,100 (25% of our run) but if that holds and we consolidate a bit, I will be downright bullish.  I will also be impressed if we hold 1,145, which was our last breakout line but, for now, we have a 3.75% drop from 1,218 but a poor bounce yesterday indicates we are likely to get down to a 5% pullback from 1,218 to 1,157 and
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Foolish Thursday – Through the Looking Glass

"If you don’t know where you are going, any road will take you there." – The Cheshire Cat

I like to sit with my daughters (8 & 10) on the couch and look at news pictures on my laptop – it’s a good way of getting them involved with the day’s events, teaching them about my job and teaching them about the world (albeit from my twisted perspective).  The USA Today is exellent for this as is Reuters and the NY Times.  As CSNY said:

Teach your children well and feed them on your dreams…

Can’t you see, you must be free to teach your children what you believe in, to make a world – that we can live in? 

Since they are kids, I often simplify what’s happening so we have a general classification of "protesters" to explain why the army or police are attacking people with no guns.  Yesterday, my 8-year old had a "eureka" moment when she said to me "Why is everyone around the World protesting – it is because of the bad economy?"  Well, she pretty much nailed it, didn’t she?  As I’ve been warning for years, the poor (all of the bottom 90% at this point) have been pushed to the edge and they are now starting to push back – so much so that it’s obvious to an 8-year old that we are on the verge of a global revolution…

That led to a little photo project we did together, where I also got to teach my daughters one of my favorite songs: "We Won’t Get Fooled Again!"  As the great and powerful Bush the 2nd once said: "Fool me once, shame on, shame on you.  Fool me ya can’t get fooled again."  That pretty much sums up my attitude on the markets right now – we cashed out at the top and, until we see some pretty DEFINITIVE proof that it was not a top, we’ll be sticking to mainly cash, thank you very much!  While Alice’s Red Queen may have said "Sometimes I’ve believed as many as six impossible things before breakfast," we’re having a little trouble swallowing what’s being dished out by our government and the MSM.  Richard Davis’s article on the lagging GDP is one example, as are many of the fine articles in our Phil’s Favorites section.

In "Through the Looking Glass" (you can tell I have kids!) Alice said "It’s no use going back to yesterday, because I was a different
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Which Way Wednesday – The Beige Book Boogie

The last Beige Book report was on January 13th.

At the time the futures were flying and we were bullish but Dow was looking toppy and I thought we were going too far, too fast and called for caution – despite our "Meatball Market" at the time.  Just like yesterday, I was not happy with the fundamentals to the point where I felt it necessary to keep pointing them out while the parade of analysts at CNBC et al told everyone to BUYBUYBUY at the 10,750 top.  I don't like to be Chicken Little but sometimes the sky is actually falling!   The  January book had very little "good" news to report (see my analysis for Members that day) and we took our money and ran on the long side.  Although it wasn't until the next Tuesday that we actually went down – it was a doozy and we fell over 500 points in 3 days, all the way to 10,165 (our 5% rule) and we continued weakly through 2/8, when we bottomed out at 9,900.

 

Whoever said this charting stuff was complicated?  Just follow the 5% rule, draw some lines and PRESTO – we know what's going to happen!  Well, at least we hope we know what's going to happen because I've spent a good portion of my week so far telling Members NOT to trust the rally we've been having and to expect a downturn with today's Beige book a possible catalyst for a correction.  From experience, we know there is not generally an immediate reaction to what is essentially a collection of anecdotal evidence about the state of the economy but it does give us an overview of the nation and I haven't seen much news in the 6 weeks since the last report to make me think this one will be showing any great improvements. 

Housing CrisisIt's a tough call at the moment because there is clearly a determined effort to get the markets to move up but we are loaded up with bullish plays from our visit to 9,900 so it pays to be a bit more bearish with our short-term plays as we test the top of our MAYBE range.  We have had some good news this morning with MBA Mortgage Applications up 14.6% as rates fell back under the magic 5% mark and, of course, that's
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Which Way Wednesday – Fed Edition

Wheee, that was fun!

There's nothing like a good sell-off when you are prepared for it.  Roll out of bed and drop 20 feet unexpectedly and it's terrifying but willingly climb to the top of a waterslide to plunge 50 feet and it's exhilarating.  By the way, if you do drop 20 feet rolling out of bed – it may be a good idea to move your bed and if your virtual portfolio took a big hit in yesterday's very minor correction, it may be time to move some of those positions as well.

We were not just prepared for a drop, we were almost bored stiff waiting for it but, in the end, the call to cash out our bull plays into the weekend was a very solid one and now we have 150 points to go before we have to consider a re-entry at those levels.  So far, we have a very minor 1.5% pullback off a 15% run since July 13th so 1.5% more to go for a 20% retrace.  That will give us 9,118 on the Dow which is, amazingly right about our 5% rule off 8,650 (9,082 to be exact) so let's call that 9,100 and VERY significant.  Our other 3% pullback lines are S&P 980, Nasdaq 1,950, NYSE 6,400 and Russell 550.  This is the great thing about being the creator of the 5% rule – I can round off if I want to because, IT'S MY RULE.

I'm sure if Fibonacci were alive today he'd say: "38.2%, 40% – what's the difference, it's just a guideline!"  Fibonacci discovered his sequences in his search for a way to blend math, art and nature.  Clearly the stock market is ruled by math and human nature but too many chartists forget the art of the thing.  That's why our 5% rule bends around psychological chart resistance points, the flexibility we have to take market psychology into account is what allows us to hit our targets on the nose a year in advance but it's the "art" of it that tends to bother people because it does require an intelligent person to look at a chart and decide which moves are real and which are not. 

Why did we predict the market would be 40% off the top at
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Phil's Favorites

Trump Tweeting As Much As Ever Amid Twitter Standoff

 

Trump Tweeting As Much As Ever Amid Twitter Standoff

By , Statista

President Trump has signed an executive order which aims to remove some of the legal protection given to social media companies, though it is expected to face significant legal hurdles. In a nutshell, it sets out to clarify the Communications Decency Act, handing regulators the power to file legal proceedings against social media companies for the way they police content on their platforms. Trump's decision to take action comes two days after Twitter attached a fact check to one of his tweets lambasting mail-in voting. He then threatened to close ...



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ValueWalk

Gold supply chain in recovery mode after pandemic shutdown

By Michelle Jones. Originally published at ValueWalk.

The gold supply chain was largely shut down as the COVID-19 pandemic spread around the world. However, things are starting to open back up, and production is beginning again. The World Gold Council studied the gold supply chain, how it was impacted by the pandemic, and how the disruption of the supply chain has affected investment demand for the yellow metal.

Q1 2020 hedge fund letters, conferences and more

Disruption to the gold supply chain

The World Gold Council said the gold supply chain is entirely global because the metal is mined on evert continent except Antarctica and refined in nume...



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Biotech/COVID-19

Antigen tests for COVID-19 are fast and easy - and could solve the coronavirus testing problem despite being somewhat inaccurate

 

Antigen tests for COVID-19 are fast and easy – and could solve the coronavirus testing problem despite being somewhat inaccurate

Antibodies are incredibly good at finding the coronavirus. Antigen tests put them to work. Sergii Iaremenko/Science Photo Library via Getty Images

Courtesy of Eugene Wu, University of Richmond

In late February, I fell ill with a fever and a cough. As a biochemist who teaches a class on viruses, I’d been tracking the outbreak of...



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Zero Hedge

Ted Cruz Accuses Twitter Of Violating Sanctions Against Iran, Demands DoJ Probe

Courtesy of ZeroHedge View original post here.

We've mentioned in nearly every single one of our posts about this week's dustup between the president and Twitter that the Ayato...



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Kimble Charting Solutions

Tech Indicator Suggesting A Historic Top Could Be Forming?

Courtesy of Chris Kimble

Tech stocks have been the clear leader of the stock market recovery rally, this year and since the lows back in 2007!

But within the ranks of leadership, and an important ratio may be sending a caution message to investors.

In today’s chart, we look at the ratio of large-cap tech stocks (the Nasdaq 100 Index) to the broader tech market (the Nasdaq Composite) on a “monthly” basis.

The large-cap concentrated Nasdaq 100 (only 100 stocks) has been the clear leader for several years versus the ...



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The Technical Traders

M2 Velocity Collapses - Could A Bottom In Capital Velocity Be Setting Up?

Courtesy of Technical Traders

M2 Velocity is the measurement of capital circulating within the economy.  The faster capital circulates within the economy, the more that capital is being deployed within the economy to create output and opportunities for economic growth.  When M2 Velocity contracts, capital is being deployed in investments or assets that prevent that capital from further circulation within the economy – thus preventing further output and opportunity growth features.

The decline in M2 Velocity over the past 10+ years has been dramatic and consistent with the dramatic new zero US Federal Reserve interest rates initiated since just after the 2008 credit crisis market colla...



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Lee's Free Thinking

US Southern States COVID19 Cases - Let's Give Credit Where Due

 

US Southern States COVID19 Cases – Let’s Give Credit Where Due

Courtesy of  

The number of new COVID 19 cases has been falling in the Northeast, but the South is not having the same experience. The number of new cases per day in each Southern state has been rangebound for the past month.

And that’s assuming that the numbers haven’t been manipulated. We know that in Georgia’s case at least, they have been. And there are suspicions about Florida as well, as the State now engages in a smear campaign against the fired employee who built its much praised COVID19 database and dashboar...



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Chart School

Is this your local response to COVID 19

Courtesy of Read the Ticker

This is off topic, but a bit of fun!


This is the standard reaction from the control freaks.








This is the song for post lock down!







What should be made mandatory? Vaccines, hell NO! This should be mandatory: Every one taking their tops off in the sun, they do in Africa!

Guess which family gets more Vitamin D and eats less sugary carbs, TV Show



...



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Digital Currencies

Blockchains can trace foods from farm to plate, but the industry is still behind the curve

 

Blockchains can trace foods from farm to plate, but the industry is still behind the curve

App-etising? LDprod

Courtesy of Michael Rogerson, University of Bath and Glenn Parry, University of Surrey

Food supply chains were vulnerable long before the coronavirus pandemic. Recent scandals have ranged from modern slavery ...



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Members' Corner

Coronavirus, 'Plandemic' and the seven traits of conspiratorial thinking

 

Coronavirus, 'Plandemic' and the seven traits of conspiratorial thinking

No matter the details of the plot, conspiracy theories follow common patterns of thought. Ranta Images/iStock/Getty Images Plus

Courtesy of John Cook, George Mason University; Sander van der Linden, University of Cambridge; Stephan Lewandowsky...



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Insider Scoop

Economic Data Scheduled For Friday

Courtesy of Benzinga

  • Data on nonfarm payrolls and unemployment rate for March will be released at 8:30 a.m. ET.
  • US Services Purchasing Managers' Index for March is scheduled for release at 9:45 a.m. ET.
  • The ISM's non-manufacturing index for March will be released at 10:00 a.m. ET.
  • The Baker Hughes North American rig count report for the latest week is scheduled for release at 1:00 p.m. ET.
...

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Promotions

Free, Live Webinar on Stocks, Options and Trading Strategies

TODAY's LIVE webinar on stocks, options and trading strategy is open to all!

Feb. 26, 1pm EST

Click HERE to join the PSW weekly webinar at 1 pm EST.

Phil will discuss positions, COVID-19, market volatility -- the selloff -- and more! 

This week, we also have a special presentation from Mike Anton of TradeExchange.com. It's a new service that we're excited to be a part of! 

Mike will show off the TradeExchange's new platform which you can try for free.  

...

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Mapping The Market

How IPOs Are Priced

Via Jean Luc 

Funny but probably true:

...

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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About Ilene:

Ilene is editor and affiliate program coordinator for PSW. Contact Ilene to learn about our affiliate and content sharing programs.