Tag Archives: technical analysis

BTFD

You all already know where I think this market is headed. However, the twitter streams are full of folks that are ready to declare yet another rally to new higher plateaus. Most investors don’t seem overly concerned about things. I certainly have not detected any real panic in either the sentiment readings or in the price action of the market.

There are still some pretty serious technical issues afflicting the market that have not been alleviated by the recent pullback. A myriad of indicators such as Put/Call ratios, Bullish Percentage indicators, volume studies, et cetera, are indicating weakness to come. I believe that the path of least resistance is to lower prices, and that the process has begun. Those are my personal opinions however, and that plus $3.50 will get you a Grande Soy Latte at Starbucks.

Anything is possible short term in this era of daily Central Bank injections of “monetary morphine” in the form of POMO. This stock market “crack” is in essence creating yet another asset bubble, this time through mispriced risk premiums in both equities and bonds. The chase for yield in a lower bound interest rate environment is the catalyst, but that is not the topic of today’s post.

You see, bubbles can go on for longer than even the most stubborn contrarian may be able to wait. Timing such reversals is treacherous at best and suicidal at worst. That’s not my point either. My topic du jour is of the incredibly obvious, yet to-date not talked about fact that the Fed’s open market operations since 2009 have created a unique moral hazard. This will act as dry tinder to the next real correction in the markets, whenever that may happen – and it WILL happen.

In the study of Psychology there is a theory of operant conditioning that was formulated by B.F. Skinner. Skinner’s theories were based on principles such as reinforcement, punishment, and extinction. Skinner created experiments using rats that would provide positive and negative stimuli creating learned behavior responses.  His Law of Effect was in essence that responses producing a satisfying effect in a particular situation become more likely to occur again, and responses producing a discomforting effect become less likely to occur again.

I would argue that the Fed has done the same with us folks in the investor class. Just like rats we are conditioned that buying any dip no matter how small will be rewarded with profits. Conversely, selling stock short or betting on stock prices to fall will be punished with severe losses. This keeps the herd moving in the same direction, but it inflates the bubble higher and higher. This learned behavior response is manifested in two phenomena currently observable in today’s financial markets: BTFD and Pavlovian Short Covering (let’s call it PSC for shorthand). Unless you have been underneath a rock in the fetal position since 2009 then you already know what BTFD stands for, but if not I’ll tell you here.

BTFD stands for Buy the Fucking Dip. The first time I saw it referenced was in a YouTube video that appeared at least a few years ago. Since then, BTFD has become somewhat of an accepted truth. After all, anybody that has bought ANY dip of ANY size over the last 4 years has made money with very few exceptions. BTFD has certainly made many of its disciples very rich and that is one of the strongest positive reinforcements a human can receive. Not only does it reinforce the behavior in the initial participants, but it has created a tractor beam of groupthink. As more and more people have benefited from the learned behavior, the strength of belief has spread far and wide and its practitioners have been emboldened.

The flip side of the reinforced behavioral response is Pavlovian Short Covering. This is the act of reflexively covering short positions at the first sign of a return of strength to the bull side. This learned behavior is based on negative stimulus exerted upon bears time after time over the last 4 years. The tactics used to elicit this PSC is mainly through extreme, and some would say purposeful, manufactured violent short squeezes. Often these bear traps are sprung in the dead of night. Index futures rise in overnight trading creating a rush to cover short positions into the opening bell. Other times at key moments when the market is threatening to roll-over, there is an almost “magical” news item that comes out creating the squeeze. Sometimes, there’s no news at all, but a certain mysterious “hand of the Patron Saint of Bulltards” comes in and ramps the futures from certain failure. This hand of God typically lifts price up and past key areas where bears generally cover their short bets to avoid further and certain excruciating pain.

Any and all of these scenarios trigger PSC, and once it begins, a feedback loop comprised of weak handed short sellers and conditioned dip buyers combine into a glorious symphony of Federal Reserve operant conditioned rats.

Now this is all fine and good until somebody pokes an eye out. This conditioning is based on experience and results that have been extremely effective in the bull-run off the 2009 S&P lows. At SOME POINT however, (I would say that point has already arrived, but some will disagree) the trend changes, and the great Bernanke Bubble pops.

When this happens, the extreme conditioning response cultivated over the past 4+ years will serve to exacerbate the eventual declines. Initially bulls will not sell their positions when the market weakens and may instead continue to aggressively buy the dip. After all this has worked like a charm in the past – why change now? Bears on the other hand, gun shy and wary of all of the relentless traps, will not be eager to short, thus creating no fuel for squeezes.

Combine all this with the fact that there are currently many crowded trades due to the narrowing participation of stocks to the recent rally (see Market Halitosis for more on this). If things turn south the low volume on the exchanges will make declines more severe. Also, there is the very real possibility that if things get really ugly then the High Frequency bid will evaporate, further lowering liquidity. Thus the unique set of stimuli creating these learned responses will eventually be the fuel that enables real conflagration to erupt. This will be the point that everyone realizes that the new phrase to learn is STFR or Sell the Fucking Rip.

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Weekend Chart Porn

Yesterday I actually spent a few hours looking through some of my favorite chart sets. Things are interesting to me again technically for the first time in quite a while. I updated a few charts and published some of them online on Stocktwits and TradingView. My bio has links to these sites if you are interested in following me there.

Price is Truth is many things to me, and from time to time I may post market related topics because they are of interest. Many of my newer followers found me through poems, or photographs, or writings about my life challenges and I am thrilled to have you reading my words. You may not even be aware that I started this blog to document my market thoughts and experiences. Over time it has morphed into something a bit different but deep down I still have an interest and passion for financial markets and technical analysis.

It’s like an artist that puts her brush down for a spell, eventually she gets the urge to paint again. So I feel currently about charting. To that end, below are a few that I worked on this weekend.

What am I looking at here?

To those who don’t typically look at price charts these may look like chicken scratch but many of them have some notes that you can read to try to figure out what I am doing. If you have any specific questions, feel free to leave a comment and I’ll do my best to answer you. Please note that my analysis is not to be construed as investment advice. Click on charts to enlarge.

VIX weekly seems ready for move higher.

VIX weekly seems ready for move higher.

 

The first chart I have for you is that of the VIX index. This is commonly referred to as the “fear index” since it tracks the market’s expectation of 30 day volatility of prices. It is constructed using the implied volatilities of a wide range of S&P 500 index options. When the VIX is low the market is said to be complacent and when it is high there is fear among investors. This chart suggests that after a multi-year “base” or consolidation that the VIX is ready for a foray to higher levels soon. This would correlate to a corresponding market swoon. Timing would be spring-summer of this year based on the chart pattern.

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Bonds making a classic W bottom. Higher prices likely.

 

The next chart is that of the exchange traded treasury bond fund TLT. This liquid ETF blends the 10 and 30 year Treasuries into what they call a 20+ year Bond Fund. I use this as a proxy for the US Treasury market (specifically the 10 and 30 year bonds). Typically as equity prices increase, bond prices decrease. This is due to market participants wishing to gain greater capital appreciation from rising equity prices and the lower yield to maturity that bonds offer when treasury prices get high. Last summer when the Federal Reserve hinted that they would “taper” or reduce their monthly treasury purchases the bond market sold off and a parabolic bubble began in stocks. The problem is that now the average dividend yield on the S&P is under 2% and the TLT pays out over a 3% yield. At some point Treasuries become attractive again relative to equities since they are backed by the full faith and credit of the US Govt. and it’s ability to force citizens to pay income tax to raise capital to pay back it’s debt. Stocks hold no such backing and are much higher on the risk spectrum. When valuations in stocks are high as they are currently, this is an issue that money managers will consider when constructing their portfolio mix.

Crude completed a bullish fractal and now looks poised for lower prices.

Crude completed a bullish fractal and now looks poised for lower prices.

 

Next up is a chart of Crude Oil. Specifically WTIC or West Texas Intermediate Crude or Texas Light Sweet. This is the benchmark grade for US Oil prices. Europe has it’s own benchmark called Brent Crude. Oil prices are tied into economic expansion and contraction and only a robust economy can withstand rising oil prices without causing a natural dampening of growth through higher input and transportation costs for manufacturers, less disposable income for households due to rising gasoline prices, etc. What this chart is telling me is that oil prices have likely topped out near term and look to at least test recent lower levels around $90 per barrel. This is a chart to continue to watch- if prices break lower this could signal a slowdown in the economy and possible deflationary forces exerting upon commodities.

ES futures (S&P 500) may be carving out a topping pattern with a July low.

ES futures (S&P 500) may be carving out a topping pattern with a July low.

 

The last chart I will post is that of the Emini futures. This is the most liquid of the S&P futures contracts that trade out of the CME (Chicago Mercantile Exchange). I have had these trend lines in place since last summer without adjusting them and price is looking currently like it may be carving out a head and shoulders top. This is still to be confirmed and frankly that is pure speculation on my part. However, I am basing my theories upon not just the price action in the index itself but in looking at different indexes, sectors, breadth indicators, currencies, and commodities. Only in looking at many different inputs can you hope to gain any accurate timing of the markets.

Based on everything I am seeing, I would not be at all surprised to see a 15-20% market correction this spring/summer to be followed by a decent rally. Once that rally happens we will have a greater idea if the market can make higher highs into 2015 or if the great bull run of 2009-2014 has topped out.

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Pissing On The Hydrant

My intention is to do some writing for this blog this weekend, but I never know if I will find the time. So this little post is a bit of a placeholder of sorts. My subject matter is likely to be market related as I am sensing something in the charts.

After many months where technical analysis was a waste of time, I have a strong sense that some changes are happening here and that charts will matter again very soon. 

Some of you will likely shrug shoulders and roll eyes and scratch heads. Some of you will be interested and some will not. Likely any post will be somewhat geeky and boring for non-traders but you may learn something if you slog through.

Anyhow, just a bit of a warning that my gut is sensing something here that I will do my best to explain when I have a moment to construct my thoughts properly.

Until then, carry on as you were.

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Market Halitosis

I did not create this Price Is Truth blog to specifically talk about stocks or Technical Analysis although I have many thoughts on the subject.

From time to time however, I may post thoughts about current market conditions if they can illustrate a point or if I feel it is worthwhile. This is one of those times.

You see, in a strongly trending market- up or down – certain technical indicators are rendered useless and others take on additional import. One long term indicator I have been watching since November of 2012 (yes – that is a long time to wait for a trigger) is the Ratio Adjusted Summation Index (RASI) which you can pull up on Stockcharts.com as $NYSI.

This is an adaptation of the standard and widely watched market breadth indicator, the McClellan Oscillator ($NYMO) and the Summation Index ($NYSIT) developed in 1969 by Sherman and Marian McClellan. If you wish to read more about this  – click here for information found on the most excellent McClellan Financial Publications website.

Anyhow back in November 2012 they put out a weekly Chart in Focus article that basically stated that most significant tops in the market could not come without a divergence between new highs and the RASI failing to hold the +500 level.

At the time the article came out the RASI had dipped below the 0 line and had bottomed and Tom McClellan (editor of both The McClellan Market Report and son of Sherman and the late Marian McClellan) speculated that the summation index would show a “neat trick” and provide the indication of fresh liquidity to fuel the market advance to new highs. He was proven correct.

However the end of the article provided another bit of advice (emphasis mine):

It is at the moment when the RASI cannot climb back up +500 that its other big magic trick becomes evident“….”Thus far, we have not seen such a failure yet.  It is really not typical for the stock market to see an important top at a really high Summation Index level, like the raw value high of +3689 seen back on Sep. 21, 2012 (RASI equivalent: +888).  A much more normal resolution is to see a dip down toward neutral like what we have just seen, and then a failing attempt for the RASI to climb back up above +500If we see that unfold in the next few weeks, with a failure by the RASI to climb back up above +500, then we’ll know that the typical weakness of the first year of a new presidential term is playing out according to the normal script.”

As it turned out, the RASI briefly stalled out at the +500 level but the next week powered higher and this indeed was the exact beginning of the 20%+ rally we have experienced since late November.

We are now in a situation that seems to suggest the long awaited divergence is coming to fruition and that this absolutely massive rally (and possibly even the longer 4+ year rally off the 666 SPX lows) may be showing it is ready to give up the ghost.

To wit, please see the most succinct and excellent chart by Jackdamn on Stocktwits that appeared yesterday:

nysi - nya

As you can plainly see, the $NYSI has failed at the +500 level after the $NYA has made marginal new highs. While this looks less than significant to the untrained eye, I encourage you to look at the July 2011 time frame to the left of the chart at the other time that this setup showed itself (although the NYSE did not make all time highs that time).

Please note that the NYSE fell from 8500 to 6500 in +/- 40 trading sessions (~25% drawdown). With the NYSE up 48% ($SPX up 59%) from those Oct 2011 lows we are now at a very tenuous moment.

This bad breadth could be a real nail in the coffin for the 2009-2013 bull run or it could just be one more indicator or divergence that gets blown away by POMO injections of liquidity and Central Bank largesse.

Time will tell, but I will wind down this post with a comment that Tom McClellan just wrote in his most recent Chart in Focus article that I take as a bit of a warning and a bookend to his Nov 2012 article:

“One of the topics that we have covered recently in our McClellan Market Report newsletter and our Daily Edition is the way that the NYSE’s A-D Line is finally showing divergences relative to prices.  And that message is getting amplified by seeing the Ratio-Adjusted Summation Index (RASI) turning down at the +500 level, which is a sign that the push to marginally higher price highs does not have liquidity behind it.  There are really useful messages that one can take from market breadth data, when sophisticated indicators and proper interpretation are applied. ”

His understated tone belies what I believe is the true import of this signal. I waited 9 months for it, but most impulsive BTFD bulls would not understand this type of patience and would probably chuckle at my conclusions.

I respond to that thought with an old saying: Revenge is a dish best served cold.

Don’t say you were not warned.

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Price is Truth

First off I need to get it out there right off the bat.  I am a net loser in the markets. I have already lost so much money that on paper it will take an act of God to ever get on the green side of the ledger. I have blown up several trading accounts and am currently short-stacked.

It is a terrible feeling because just as I have tapped my resources my knowledge and wisdom have grown exponentially.

Why do I even care about the markets at this point?  Really I should hate them – they should revolt me. But they don’t.  Each day is like a new puzzle waiting to be solved. Each day is a day that my thesis du jour gets tested and proved to be right or wrong.

How do I know if I am right or wrong?

Price is Truth

This is a powerful lesson that I had to learn. That I am still learning.

One of many lessons that I have learned in the last four years of my life since I was laid off from a great Advertising sales job in 2009 because of the credit bubble popping. That is the moment that I stumbled upon what I now consider to be my great passion, the financial markets.  If I had known then the road I would take when I started paying attention to the market there is no way I would have gotten involved in this den of vipers but here I am and I cannot shake its gravitational pull.

The market is a harsh teacher and critic and takes no prisoners and does not respond to any one person’s hope or desire.

The market is on her own schedule and rhythm and if you align yourself properly to her energies you can surf the wave with great success and seemingly with little efforts but if you take for granted the sheer power of the forces that you are tapping into you are putting yourself at risk for mortal peril.

The only thing that can be used to judge success is price.

It’s really a simple concept but some people never do ever truly grasp the significance of that concept and forever are in search of the holy grail of investing and the secret to long-term wealth from the markets.

But I am convinced the secret is somewhere in the price action.

Why am I writing this? Well partially I feel the compulsion to write about my experiences to get them on paper so as not to forget the really important lessons.  This is partially a self-journey, a healing process if you will.

Not that I can really ever truly forget what I have done since many of my choices ended up costing me hard earned money and confidence. Costing me trust from my wife that I love and the wife that put her faith in me. Costing me years of time spent on a losing proposition – putting me at great risk of future gainful employment in the middle of arguably the toughest economy since the Great Depression.

In other words I fucked up big time. I gambled and I lost and it hurts like hell.  I have nobody to blame but myself and I take full credit and responsibility for my gains and losses.

That was another lesson I had to learn.

I have seemingly made every possible mistake there is to be made in the markets and I still make them.  But I am in the process of working on my faults one by one. Desperately searching for the discipline to conquer my inner demons.

I have learned incredible things along the way. I feel I have something to offer to those who are looking for a different perspective and a story to tell the world about how the game is played even though I never worked in the Investment industry and don’t have any licenses to offer investment advice and frankly if you came here to get any of that you were always going to go away sorely disappointed and that is fine because that is not what I am doing here.

Do I think I have the skills to pay the bills? Fuck yes, in fact I believe in my skills to the ends of the earth. Why? Because of the sheer amount of time I have put into my craft. I have a passion for it, plus a natural gift for seeing subtle differences that others miss.

But only through actual time spent watching price tick by tick, year by year and observing and understanding all of the interactions do I now feel that I function on an almost unconscious level when I look at a chart.  I am a bit of a charting savant and spend way too much time daily looking at charts. Call me a chart geek and I probably would not argue the point.

That in itself means NOTHING. That in itself is NOT any big fucking deal. There are a ton of great chartists and everyone is looking at the same thing. I am not patting myself on the back here in fact I am saying that it really does not matter except that I want you all to know that you can be really good at one piece of the puzzle but to be successful in life or in the markets the end result is what really matters. Scoreboard bitches!

If only I knew then what I know now – If only…but you cannot roll back the clock and there are no do-overs in the markets or in life. I am short stacked and now I need to play small ball until I can build myself back to where I need to be to fully utilize my talents and hard earned wisdom and that is all on me.

Despite the pain and misery and suffering the markets have bestowed on me I will not quit. I feel in my soul that the tuition paid in my blood will eventually come back to me and that there is a reason for my twisted and wicked path to date. There needed to be the pain first in order to get to the pleasure later when it will really matter.

I invite you to join me on my journey and maybe in the process we can all learn something important about the markets and more importantly about life and about the infinite wisdom of the Universe.

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