Category Archives: Strategy

Posts regarding investing strategies and developments in the broader world of investing.

Arching Over

As spring wears on, the market tends to slow, and this process is evident in 2017. While the major indices have all been making new all-time highs recently, the pace of appreciation has diminished from that of the November-March period.

The S&P 500 has settled into a tighter upward sloping range of late (black channel), while also interacting with the lower end of the aforementioned November-March trend (green channel). The index looks set to follow this recent path for the foreseeable future, with support in the 1370 region, clearly visible on the 30 minute and hourly charts.

While we can safely expect some periods of turbulence and consolidation during the summer doldrums, the market’s longer term up-trend shows all signs of remaining intact, despite numerous potential geopolitical and economic risks. However, if looking for entry points for new capital, there is ample reason to wait and take advantage of entry points on the lower end of the recent rising range when they present themselves.

S&P 500, hourly bars

S&P 500, 30 minute bars

S&P 500, daily bars

Acquiescence

The opposite of quiescence. What we have here now in US equities is the sudden, explosive return of volatility, volatility that was wholly absent over most of the summer post-Brexit. With it has come a return of high inter-asset class correlation and low dispersion; a return to risk-on, risk-off behavior.

The latest bout has been Fed induced and Fed stoked, with FOMC voters and non-voters alike sending somewhat mixed signals about the course of monetary policy for the remainder of 2016. Rate hike expectations abound with little certainty as to timing. September’s will, though, be a live meeting, and the markets will be on a razor’s edge. Expect big moves next Wednesday.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

Technically, the market has brought itself down to some nice support, off of which it has bounced dramatically. The drought is over; we have seen back to back 1% + up or down days after one of the longest spells of very small daily moves in decades. The market, while at a significant support level (one that presented resistance back in June), probably still has farther to fall. The rising trend channel line (orange) at 2108 may be place to pause and bounce, like the market did in May earlier this year (see daily chart below).

S&P 500, daily bars

S&P 500, daily bars

Below 2108, the next serious support comes in around the 2050s, where the market abruptly turned after the Brexit referendum. Its possible a level in this range could present a good buying opportunity if reached as we close out the summer selling season and move into late fall. Once we’re well into the 4th quarter, we enter the beginning of the strongest seasonal period of the year, when its very likely we could get a strong rally. The election may present some road bumps, but we will be following the technical developments and keep you updated.

Good luck out there.

Tag

Continuing the string of gains off the lows in February, the S&P 500 has finally tagged the 2100 level for the first time since December 2nd. Drilling down to the near term movement, the rallies of the past few trading days has taken the index to the top of its recent rising range. Within this pocket at the top of the channel, the market has generally found a place to cool off before pulling back to consolidate in the pocket at the lower end of the rising channel.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

These points at the extreme edges of the range (within the “pockets”) have provided good entry and exit points for swing trades in the recent past. Beware, though, that these trading ranges develop and break down rapidly, and often with little advance notice, so if playing the levels, be sure to select entry points carefully and apply tight stops. If (really when) the range breaks down, you’ll know pretty quickly that the structure is breaking down, and that its time to get out and re-evaluate.

S&P 500, daily bars

S&P 500, daily bars

Still, the channels often last long enough that they can produce a number of decent trade setups, provided the proper care and planning go into each trade. Be sure to limit drawdown on any trade that goes against you; preservation of capital is EXTREMELY important. Don’t let a small loss turn into a big one.

Good luck out there.

Deceleration

The S&P 500 continues to decelerate after reaching the topmost resistance levels of the downward trending channel in place originating May 2015. Today, the market broke below the two converging support levels: one short term upward trending level and the other a medium term downward trending level. They are light blue and dark blue on the charts, respectively.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

This break is a likely indicator that a significant retracement of recent gains. If recent history is any indication, the most important downside target should selling pressures increase currently falls right around 1975, with a very decent buying point falling just below around 1962. The market has made moves very similar to this three or four times since last October, punctuated by the fall in January.

S&P 500, daily bars

S&P 500, daily bars

With the market weakening, this may be the time to pare back profitable long positions, and prepare for a pullback. That said, should we close the day above the levels I mentioned above, this may be a fake out before the market heads higher. Tops take time, so exercising patience will no doubt pay off. As always, keep an eye on price behavior, and good luck out there.

Taking the Long View

This post is going to be a chartfest, pure and simple. I’ve got a selection of S&P 500 charts (my specialty) here ranging from 30 minutes to yearly OHLC bars, but all with the same levels I’m following retained to help give an idea of the scale of the current operative range on the S&P 500, from a close look at the recent trading levels zooming out to a the multi decade trend we’re still moving within.

I will add more commentary in subsequent posts, but for now, I will let the charts do the talking.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

S&P 500, hourly bars

S&P 500, hourly bars

S&P 500, daily bars

S&P 500, daily bars

S&P 500, weekly bars

S&P 500, weekly bars

S&P 500, 8 day bars

S&P 500, 8 day bars

S&P 500, yearly

S&P 500, yearly

Well Defined

Today we’re looking at the charts from a different angle. Below are plots of the S&P from longest to shortest perspective, as opposed to the other way round as I usually present them. They all show a market that has followed sets of well-defined trends for some time. The challenge is just a matter of identifying them, whether they are short, medium or long term, and tracking how they break and shift over time. These points often make for great high percentage trade setups.

Taking a multi-frame perspective, from near term to long term or vice versa, is something I find very helpful in my trading day to day in identifying these setups. It helps me analyze the condition of the index, finding important lines of support and resistance, and put seemingly random day to day moves into a more systematic context. Put simply, it allows the story behind the data to come through more clearly.

S&P 500, daily bars, 2014.11.19

S&P 500, daily bars, 2014.11.19

The daily chart illustrates best just how strong the bull market has been in the past two years.

S&P 500, hourly bars, 2014.11.19

S&P 500, hourly bars, 2014.11.19

On the hourly, note the three phases of the move from the October 15th low that I’ve written about a number of times in recent posts.

S&P 500, 10 minute bars, 2014.11.19

S&P 500, 10 minute bars, 2014.11.19

The most recent phase is still well intact and developing nicely.

S&P 500, 3 minute bars, 2014.11.19

S&P 500, 3 minute bars, 2014.11.19

Right now, despite remaining fundamentally bullish, I’m a little uneasy with how calm this market has been lately, and the frequency with which the market has been testing rising lower trend channel support. Seasonality also favors caution in the coming week; the days leading up to Thanksgiving have a tended to see pullbacks in the past. Black Friday is often a better day to buy stocks than it is to buy discounted merchandise.

History is never gospel, and the trend doesn’t lie, but the listlessness in the market in recent weeks makes now as good a time as any to pare back any long exposure that may be keeping you up at night.

I’ll be back with an update tomorrow.

Random, Or Not?

Lots of people get frustrated with markets for seemingly random behavior. The reputation is not completely undeserved. However, sometimes events in the market trace out patterns that seems anything but random.

Case in point: The sell-off and subsequent rebound in October. It takes the cake for symmetry. The pattern traced out in the past two months is truly amazing, an almost perfect “V” shape low, with proportions that almost make it look deliberate, like somebody drew it by hand. Well, maybe not THAT deliberate, but amazingly close, considering this is the stock market.

S&P 500, hourly bars

S&P 500, hourly bars

Maybe it is just random. Maybe it is just coincidence. Its striking nonetheless. What is also striking is how the market bounced off of the long term lower channel boundary (the lightly upward sloping red line on the bottom of the chart) after violating it, almost like it was a trampoline. This is the multi-year rising lower trend-line that goes all the way back to the 2009 and 2011 lows. This was an important level to hold; the fact that it did hold was both a very bullish signal, and a fantastic early indicator of a buyable bottom after the scary decline in early October.

Its also a vindication of the technical approach to stock market analysis, particularly for indices. Indices and asset classes that move based more on macro-level, systematic drivers, such as growth, interest rates and trade flows, lend themselves to technical analysis much more so than individual stocks, which involve more individual business risk. Its the systematic price drivers that technicals help model, and there’s decades of research to back this up. Basically, indices and macro level assets do tend to behave in certain ways at technically identifiable levels.

This is far from breaking news. Still, when you see it working in action like we did in October, its worth mention. It never fails to blow me away.