Saturday, August 13, 2011

Post 2008 international bank performance


Here’s the legend of a small sampling of international banks but interesting nevertheless:
Black: Bank of Montreal ($BMO), Green: TD Bank ($TD), Blue: JP Morgan ($JPM),  Purple: Banco Santander ($STD),  Red: HSBC ($HBC), Orange: Bank of America ($BAC), Yellow: Citibank ($C), ,
Note how they look like they converge near the bottom of the 2008 crisis and how differently they rebound (especially the top two Canadian banks).

The more volatile the market, the better the weekend reading


Some of the best articles we’re read in a long time came up this weekend.  Grab a coffee and go through these:

We’re big fans of Jeremy Grantham (even though not actionable in any sense for traders of our time-frame we find his writing brilliant) and this interview did not disappoint:
Can Jeremy Grantham Profit from Ecological Mayhem?   A few of our favorite excerpts:
“Phosphorus makes up 1 percent of your body weight,” he said, looking up from the page to catch my eye. “It’s a basic element, the residue of exploded stars. You can’t just make more.” He also pointed out that most economists see global trade as a win-win proposition, but resource limitation turns it into a win-lose, zero-sum contest. “The faster China grows, the higher grain prices go, the more people in China or India who upgrade to meat, the higher the tendency for Africa to starve,” he said.
“Grantham believes that the best approach may be to recast global warming, which depresses crop yields and worsens soil erosion, as a factor contributing to resource depletion. “People are naturally much more responsive to finite resources than they are to climate change,” he said. “Global warming is bad news. Finite resources is investment advice.” He believes this shift in emphasis plays to Americans’ strength. “Americans are just about the worst at dealing with long-term problems, down there with Uzbekistan,” he said, “but they respond to a market signal better than almost anyone. They roll the dice bigger and quicker than most.”
“Grantham, who says that “this time it’s different are the four most dangerous words in the English language,” has become a connoisseur of bubbles. His historical study of more than 300 of them shows the same pattern occurring again and again. A bump in sales or some other impressive development causes people to get excited. When they do, the price of that asset class — South Sea company shares, dot-coms — goes up, and human nature and the financial industry conspire to push it higher. People want to hear good news; they tend to be bad with numbers and uncertainty, and to assume that present conditions will persist. In the financial industry, the imperative to minimize career risk produces herd behavior. As John Maynard Keynes, one of Grantham’s heroes, put it, “A sound banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.” All these factors contribute to a surge of what Keynes called “animal spirits,” which encourages people to convince themselves that this time prices will just rise and rise.”
When prices go up and stay up, it’s not a bubble. Prices may always revert to the mean, but the mean can change; that’s a paradigm shift. As Grantham tells it, oil went first. For a century it steadily returned to about $16 a barrel in today’s currency, then in 1974 the mean shifted to about $35, and Grantham believes it has recently doubled again. Metals and nearly everything else — coal, corn, palm oil, soybeans, sugar, cotton — appear to be following suit. “From now on, price pressure and shortages of resources will be a permanent feature of our lives,” he argues. “The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.”
Here is the full text of the GMO letter.  Not exactly “merry” reading but definitely worth your time:  (thanks @radenmasbowo for the links)
Part I
Part 2

Two articles focused on the stink bombs coming our way from Europe:

Can Germany defend the Euro?
Global Jitters Gather Over State of Société Générale

Post from Barry Ritholtz at the Big Picture who is our Go-To guy for times of marco crisis:

How the Fed Got Itself Boxed In — fantastic article that gives light to our current situation.   Even this week you could hear traders/investors complaining about the lack of Fed intervention into the crash.   We expect the Fed now to get us out of trouble everytime the market crashes, and that mentality is problematic.  Read the excellent post.

John Maudlin’s “The Beginning of the Endgame” (via The Big Picture)– very stark letter by John Maudlin, great read.
And of course as traders we need to end off with a trading link.  As usual, good stuff from Trader Ken:
Bear Flags Everywhere by IndependentTrdr:  great quick review of major sectors and the bear patterns.  Woof.   As he writes, we either break down the bear flags or negate the patterns.  Stay tuned.

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Thursday, August 11, 2011

Daytrader Toolbox, EMA talk


We wanted to go a bit further into how we trade futures and use the EMA.  A couple of points:
 
  • The reason we watch 3 min, 5 min, 15 min, and 60 min simultaneously is because we always want to know which time-frame the market is keying off.   Our golden standard for 10AM to 1PM is usually the 5 min chart with 9/20EMA.  But we also often have an eye on the 15 min chart.
  • Most times the market responds to the EMAs/ pivot points on the $SPY, but not always.   Lately we’ve found the $ES_F has been leading.   Note that Pivot points on SPY/ES_F do not correspond with each other.
  • We’ve also often found that the ES trades better when we have no daily spots (stock alerts), which of course works well as a complement.  Volatility in stocks makes things very messy, but often gives excellent ES opportunities.
  • We try to only trade futures when the EMA is smooth ascending/descending.   For our way of trading if we only trade the ES_F when the EMA is non-wavy our consistency rate is excellent, and the exact inverse is true when it’s wavy/flat. 
 
 
 
We were keying off the 15 min on the ES_F today — note the perfect Indy set-up.  We run up fast to 1150 zone, base until 9 EMA catches up, and then rip up.  Excellent long risk/reward trade. 
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SPY 5 min was also decent pattern, but not as clear.   Note how SPY constantly hammered on the EMA refusing to close under it, finding support on R1 – very bullish sign.
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Second clear trade came at shorting R2 with a very tight stop on the ES_F for a decent scalp.   The only way though to take a short like this is when stock rips up from base extended from base, and into resistance.  If EMA had caught up we would never go short this pattern.  
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Wednesday, August 10, 2011

More Random Thoughts


  • We’re deeply oversold and we feel it in our bones that the US market wants to rally (be it even a few day dead-cat bounce) but it can’t until there’s some semblance of order in Europe.  You can hear the collective sigh of relief at 11:30 EST every day as Europe markets close.   We rallied on what was perceived to be negative news yesterday and even bad news that is not catastrophic could get this market going.
  • That coffee stocks are rallying today shows us there is some appetite for momentum, which is bullish  ($JVA $GMCR $DNKN).  Again though we need the European stabilization before this can mean anything substantial.
  • Rumors need to dissipate (no France downgrade would be nice start) and French banks need to stabilize.    (If you have Interactive Brokers you can watch Societe General via GLE once you subscribe to Europe data feed)
  • We’re itching to pick up some names but just can’t do it with the current overnight risk.    Our swing-trader hat is in the closet and we’re only daytrading and barely that right now.   Today thus far it’s been edge-less chop.
  • We  live by charts and make our living via charts but charts aren’t going to help us if Europe implodes.   Our rational side tells us that Europe won’t let France go down as the stakes are too high, similar to”knowing” in the back of our heads that the idiot politicians wouldn’t actually let US default.  But at same time we don’t want to risk our hard-earned money on that either.
  • This leaves us to hitting singles and forgetting about home runs for now.    When things stabilize we’ll pay up for it — in no rush to get into anything right now as it’s beyond our risk tolerance.    Everything we do is vis-a-vis risk and the risk right now is too high for us to try to find the bottom of a news-driven market.

Tuesday, August 09, 2011

Random Thoughts


  • Historic range today as we are now 9% higher than the overnight low ($ES_F).   The only way to interpret the close was that it was very bullish — FOMC was perceived as a negative for the market in that there was no QE3– market sold off, paused, and then ripped higher finishing on the highs.
  •  As the trading maxim goes:  going up on bad news is always very bullish.  Of course we also to have to keep in mind that the best rallies come in bear markets.  However, as active traders, let’s not worry about that one yet and enjoy some possible short-term moves up for the immediate future.
  • The big test for us as to whether this is a bottom, or nothing more than a dead cat bounce, is what happens on the test of the underside of the 2009 trend-line:
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Trend-line on the $SPY currently near 128 –  still a long way off but definitely something that is on our radar.     Unless there’s some new events coming out of Europe our thinking is that the short-term bias is long for the next few days at least.  1077 short term bottom.

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Monday, August 08, 2011

Orderly Panic


As we wrote last night $SPY had significant support at 115.2 and 113.2.   Today’s bounce came at 115.28.    Nice to be right (daytrade 115.2 to EMA at 117 was the typical HCPG strategy day-trade which is now finished), but on days like this we don’t expect perfect, text-book bounces, we expect messy overshoots.

Bounce on 115.2, rally to EMA, and base.    This is the kind of chart we expect on a normal support trade on a typical day.   Not after the day the US loses triple AAA status.     If indeed we bounce from these levels we think it would just be a pause for further selling in the coming days.  This is orderly selling, no fear.   No overshoot, no mess, no blood.    This is what we meant earlier when we wrote that we were “non-believers” on this 115.2 bounce.    It’s too clinically perfect.     We go through today’s lows though be it today or later this week and things will get hairier.  And if we’re wrong, well then we just missed a bottom by being in cash.  Worse things have happened.
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Too Perfect


As we wrote last night $SPY had significant support at 115.2 and 113.2.   Today’s bounce came at 115.28.    Nice to be right (daytrade 115.2 to EMA at 117 was the typical HCPG strategy day-trade which is now finished), but on days like this we don’t expect perfect, text-book bounces, we expect messy overshoots.

Bounce on 115.2, rally to EMA, and base.    This is the kind of chart we expect on a normal support trade on a typical day.   Not after the day the US loses triple AAA status.     If indeed we bounce from these levels we think it would just be a pause for further selling in the coming days.  This is orderly selling, no fear.   No overshoot, no mess, no blood.    This is what we meant earlier when we wrote that we were “non-believers” on this 115.2 bounce.    It’s too clinically perfect.     We go through today’s lows though be it today or later this week and things will get hairier.  And if we’re wrong, well then we just missed a bottom by being in cash.  Worse things have happened.
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Sunday, August 07, 2011

Going Forward

From our newsletter this weekend:

It really all started to fall apart after we broke the big 2009 trend-line that we have been talking about for months.  Our motto was, as long as we hold the trend-line, bias is long.  Once we break it, then re-assess.    If you haven’t already please read our post http://highchartpatterns.net/technicals-meet-fundamentals-again/.   

We expect some sort of oversold bounce but after that most likely the most frequent set-ups will be a) resistance shorts and b) breakdown shorts.   If the market starts to heal itself (which occurs when bounces are not automatically sold) then long set-ups will appear in our scans.   
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Next significant support levels for the $SPY are 115.2 and 113.2 but the technical case for the bull market — which we have always framed against the 2009 trend-line– was over on last Monday’s break of $127.5.


For the shorter time-frame Sunday night futures $ES_F are holding the Friday lows — no panic yet, just a give back of the last few hours of the Friday afternoon rally.
That’s the first short-term line in the sand for tomorrow.
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It feels like we’re lurching from crisis to crisis these days — prepare for some crazy times.   Our game plan is to go for consistency, playing defense, hitting singles, and not looking to become heroes.
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