JJG Still Ain’t Ready

In my last post, I stated that I’d be sharing some thoughts on college football and I will later today with another post or no later than tomorrow. That’s a promise for any sports gambling addict readers who’ve been waiting with bated breath to read my words. I just wanted to share a couple of quick thoughts. One on JJG, which I wrote about a couple of months ago. Additionally, I wanted to share a note from the Price Action Lab blog as well. I regularly follow Mr. Harris’s work, but his note on Friday the 19th was the best work I’ve seen out of him.

For any readers who deign to label themselves technical analysts it’s a must-read. Really it’s a must read for any trader. In the very short but sweet article he covers these BTFD, V-shaped recoveries that started in 2012, agreeing with the timeline I also posited when squiggly-reading began losing its efficacy. Harris hypothesizes that this is due to central bank intervention. Have a look at the chart for yourself and consider back to the hard balance sheet expansion of the world’s central banks.

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Harris goes on to opine that indexing’s time in the sun may have an abrupt shift into darkness. As for the last 5 years, he also basically states that what has been won’t always be. Take it for whatever it’s worth, but I recommend taking a few minutes to ingest the article.

Regarding JJG, don’t feel bad if you tried to bottom-tick that one too early. Them’s the breaks. I had stated that the trade looked ripe but that my indicators weren’t giving me a go. I also stated that I would send out an update if the indicators give the green light. Now this ain’t the update for the green light, it’s just to let any readers know that we’re still keeping an eye on the ETF. Soybeans, corn, and wheat are getting destroyed. It’s serious destruction and the greater commodity index (CRB) just took a dip past support, so it’s not looking good for a trade anytime in the immediate future.

However, one of my indicators has flattened out and the other appears to be following. Even if they do shift, that may simply lead to some bottom bouncing consolidation for several months as opposed to a V-shaped rocket ride upward. I wouldn’t expect a coffee style abrupt turnaround, but anything’s possible. Have a look at the weekly JJG chart in case you haven’t in a while.

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Once the indicators have turned in favor of an uptrend, then the HFT shops may just juice this thing for nice little return. I hope to have you along for the ride on the timing of that one. We’ll have to wait and see. For reference sake, let’s take a look back at coffee’s beautiful halt to its downtrend and abrupt rocket ride upwards for the lucky schleps(or skilled) who rode that trend to the bank.

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Alright, so read that article from the Price Action Lab blog. Keep a wary eye on soybeans, corn, and wheat. And enjoy Saturday. College football is back, so go pay your bookie a visit and dare to be great.

PS: Marginrich.com does not condone nor endorse any illegal activity regarding unsanctioned and unlicensed sports wagering. If you are compelled beyond your will to place wagers on the outcome of any sporting event maybe it’s time to seek counseling and admit the problem is real. Read those two sentences really fast like the MicroMachines commercial guy with the moustache from the 80’s and it’ll sound real official. And for anyone who thinks I’m insensitive to the genuine sickness that is a gambling addiction and reads articles here, get real, I write about speculation regularly.

A Read of the Tea Leaves and an Update to the ETF Portfolios

Well how about that correction in the S&P 500? Everyone suffered the 6% downward move and now we can all resume earning wealth…or can we? Is there some negative energy left in these markets? The tea leaves tell me that the corrective move is not over. As a reminder, just reading the tea leaves is about as antiquated as can get for a method of analysis. Looking at some squiggles on a chart and then making wholesale investment decisions is dangerous, but still, I think it’s one of the practical components on the speculator’s tool belt.

Let’s start by taking a look at the S&P 500, using SPY(weekly) as our proxy, and then we’ll move into some complimentary areas that may help shape the analysis. Bear in mind with Plunge Protection out there and HFT pace-setting through momentum ignition, all analysis is completely nullified should new highs be strongly set and the uptrend is fully resumed. Now prepare to be over-charted.

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I think when this correction resumes, we’re looking at an endpoint underneath the 50-Day EMA(blue line). I think it’ll kiss that into the 165ish area before bottoming out. I just don’t believe that a 6% move down is the end of it. In 2013, all the corrective moves capitulated at the Bollinger mid-point. From the wide ranging fear that I observed, that just doesn’t feel appropriate for the correction here to start 2014.

Take a look at the VIX for moment. Yeah, yeah, I know the VIX is played out but it still provides clues as just one chart of many in attempting to get a better feel for market action.

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The markets haven’t seen fear like that since 2011. Another one of my favorite indicators, the NYMO, is indicating some further weakness. I’ve previously commented on the NYMO’s ability to help traders get positioned for market action. It’s hitting not one, but two indicators providing a signal for a resumption to the downside. Observe:

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I have no worries that the major uptrend will resume after the corrective washout. These markets have been in need of a steam release for some time, but the obvious path of least resistance is upward. Those little exhalations near the end of 2013 essentially counted as non-moves, so a little fear and loathing is healthy for the uptrend to renew with some vigor going into the 2nd quarter. There are a couple of additional asset classes that may potentially shed a little light as to further direction subsequent to the completion of the corrective move. First, there is the yield on the 10-year Treasuries:

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Okay, all kidding aside on my make-believe and totally fake “Rhombus of Hades” pattern, a downside move in yields in combination with ZIRP will continue to push market players into equities; especially if that yield pushes much lower to potentially 2.4% or even as low as 2%. I’m not saying that yields aren’t going to go higher in the long-term, just that the near-term outlook is presenting a potentially downward path in yields.

The Nikkei has maintained a fairly solid correlation with the S&P 500 and its action looks constructive as it may be basing for a resumption of its own uptrend. The two indicators below are the MACD and Full Stokes.

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One last set of charts I’d like to share is the Equity Hedging Index(“EHI”). The EHI is one of the many proprietary models that can be found at SentimentTrader.com. It’s a contrary indicator, meaning lower extremes in the chart should produce a rally in the markets and vice versa. The EHI aggregates several inputs such as cash raising, Put purchases, and various other factors in order to construct a usable indicator. For more details, visit the site and take a free trial to see if the service is right for you. As I’ve stated on numerous occasions, I do not receive any compensation from them and I’m quite confident they don’t even know the MarginRich blog exists. Fortunately for my readers, Jason Goepfert, proprietor of SentimentTrader, is cool enough to allow people to republish his work as long as it’s not excessive and the work is credited.

Here’s a current read of the EHI.

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And in case you need a visual on how well the EHI has performed in assisting traders see where some of the bigger turns have been occurring, observe the following chart from January 14th, 2014.

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It’s not perfect, but then again, no single indicator is. If using technical analysis, it’s best to observe a wide variety of charts and cumulatively interpret them, so that one may obtain a more productive assessment. But this is all rubbish really because bias inherently sways emotions and thought process, and thus the analytical outcome must be considered questionable. If this sort of analysis is all you rely on, such as what I do here for the blog, then more power to you. For the record, before committing my own capital I analyze a broad swath of data; not just squiggles. Occasionally, squiggles may be all it takes to ascertain that a function-able trade has presented itself, but I like to mix fundamental analysis in combination with micro or macro economic reads.

It is decidedly better to test quantifiable inputs to statistically determine, so to speak, probable outcomes when attempting to make valid trading decisions. Have a read of this Price Action Lab blog entry. Based on his analysis, Mr. Harris states that the market is in mean-reverting mode. Long story short, he basically states that the market is fragile and so any suitable catalyst could cause a correction.

My conclusion is that I wouldn’t pick now to be throwing all my chips into the middle of the table as if everything is all clear. There are enough signals out there stating that one should trade with caution, especially if attempting to position long. It may be best to wait in cash, but if you gots the stones and the know-how, then it appears a nice set-up is forming for shorting or Put option strategies.

Before I bid you adieu, just want to let readers know that I’ve created a new link up top called Portfolio Updates. That’s where I’ll be placing the ETF portfolio updates from the January post titled, A Few Sample ETF Portfolios to Watch. I would describe the results thus far as interesting, but not all that compelling just yet. If you haven’t read the article then click the link and have a read, then check the updates to see how they are stacking up.

Hardest Time in History to Speculate

One of the themes I continue to hit on is the importance behind attempting to fill one’s noggin with as much knowledge as possible, so as to attempt to speculate as intelligently as possible. No easy task considering the quantity and depth of material that exists. I wanted to provide a couple of recent examples of what the average amateur speculator is up against from the world of professionals. Keep in mind that these example-providers aren’t billionaire fund managers; just investment professionals who operate successful businesses and publish outstanding investment blogs.

The first example is from MercenaryTrader.com. In my previous post I touched on an idea regarding the Baltic Dry and the potential for some short ideas. It turned out to be correct, but was it luck or quality analysis? I can’t truly quantify how I came to the decision. I review certain indicators. Observe past price action. Note the extremes and their duration. Extrapolate data and choose to establish a play. My analysis shared on MarginRich was not exactly deep, especially when compared to the MT team’s post titled, Tanker Stocks Have Triple-Digit Upside (If They Survive). A little self-deprecation is in order when I say that their analysis of the Baltic Dry and the dry shippers makes my post look like a donkey wrote it. The MarginRich post may have been prescient but I wouldn’t exactly give myself an A+ for thoroughness. All the same, I just wanted to briefly provide a tradable idea for readers. Mission accomplished. And in pointing out MT’s article, I am looking to illustrate the analytical skillset of what the average amateur speculator is up against.

The second example is from the Price Action Lab blog. Michael Harris is the creator and proprietor of Price Action Lab software, which is geared to the professional speculator. The software allows for systematic, algorithmic trading which is very simply the trading world we live in today. I don’t utilize an algorithmic approach which is probably very hazardous to my financial health, but I also don’t blindly follow patterns recognized 80 to 100 years ago and fully exploited by the 80’s and 90’s. A double-bottom or a heads & shoulder may be indicating something or the pattern may just be telling you that you’re about to get your face ripped off. That’s where the ability to fundamentally assess an equity or truly evaluate the macro-economic outlook for a particular ETF or commodity can provide a potential edge when going up against the algos. Mr. Harris provided a great illustration of that utilizing Google in his most recent post, Naive Chartists Get Crashed Shorting Google.

Defining your edge and ensuring it is truly robust is more important than ever if you’re going to play the game. Thousands of hedge funds sprang up between the late 90’s and now…and thousands have closed up shop. Even really and truly bright fund managers with a great educational background combined with an advantageous family lineage are consistently getting burned, having to pay out and close up. Don’t agree with my post’s title heading? Here’s some content from an interview with Stanley Druckenmiller that made its way around the web during the summer. The interview content is courtesy of ZeroHedge via Hugo Scott-Gall of Goldman Sachs. No matter what you think of his political ideologies or anything else about the man, Druckenmiller’s success speaks for itself and his commentary is always worth a listen. Druckenmiller states about speculating:

It has become harder for me, because the importance of my skills is receding. Part of my advantage, is that my strength is economic forecasting, but that only works in free markets, when markets are smarter than people. That’s how I started. I watched the stock market, how equities reacted to change in levels of economic activity and I could understand how price signals worked and how to forecast them. Today, all these price signals are compromised and I’m seriously questioning whether I have any competitive advantage left. Ten years ago, if the stock market had done what it has just done now, I could practically guarantee you that growth was going to accelerate. Now, it’s a possibility, but I would rather say that the market is rigged and people are chasing these assets, without growth necessarily backing confidence. It’s not predicting anything the way it used to and that really makes me reconsider my ability to generate superior returns. If the most important price in the most important economy in the world is being rigged, and everything else is priced off it, what am I supposed to read into other price movements?

For most it is simply not practical to be actively managing your funds. Now with the recent announcement of the dismal science Nobel winners, EMH and passive indexing are making the heavy rounds around the web. For good reason too, when you consider all the recent performance data. There is always more than one way to skin a cat and the truly resourceful(but “un-utilityful”) will continue to discover profitable ways of moving money around to generate profit. Build your knowledge base, simplify your financial life, and find that edge if you really think you have the chops to beat the market.