Saturday, March 28, 2009

Technical Update 11.09

As I mentioned last week, I was caught by surprise by the magnitude of this rally. Most frustrating is that I had been expecting a major countertrend rally starting this spring. When it started 10 days sooner than I expected, I didn't believe it. Thankfully, I've learned from past lessons and haven't tried to fight it. But it is not easy to see the potential gains melt away before my eyes. For example, the JPM calls I had purchased and "prudently" sold at a profit for a double would have turned into a 5 bagger. The remaining puts I had (only about 30% of what I had from the Jan highs) have lost 60% of their premium. I was also whipped out of my silver shorts for a tiny profit - after congratulating myself for a top well picked.

But to keep this in perspective, it comes after a 6 month period where I couldn't seem to do anything wrong and had more than doubled my trading account. 2 steps forward, 1 step back. Fine with me. One needs to be careful not to get too frustrated with mere mortality. I've seen many turn the one step back into three. So what to do? Try an analogy:

When I'm playing tennis, I often find myself down 0-30 while trying to serve out the set. Should one toss his racquet to the screen in anger and go for the powerbomb ace on the next point? Or should one take an extra few seconds, some deep breaths, and focus on what has been working previously?

When trading, I have two solutions that work best. The first is to look at longer time frames. Put away the daily charts and see what is going on in the bigger picture. So today I'll focus on weekly and monthly charts.

As I mention often, Elliott Waves are one of my many tools to determine market trend. Many think EW is garbage. I think it is just widely misunderstood. What it does is provide context and give you a number of different interpretations as to what has happened in the past. EW has a number of "rules" that are used to determine this. For any given pattern, only a number of these rules will be satisfied. For example, a certain pattern can be numbered with 10 of a possible 12 rules satisfied. There could be other interpretations that have 6, 4 and 3 rules satisfied. Depending on the number of rules satisfied, the different interpretations jockey for position as the most likely candidate. So when the S&P broke the 750 level last week, I knew that my interpretation wasn't correct, and another one had taken top spot. By knowing this, I was spared the frustration of shorting this rally.

As of now, the higher probability interpretation is for a continuation of this rally (perhaps after a small pullback to 770ish). There are other interpretations that indicate nearly immediate lower lows. But I don't like betting on low probability events. Let's take a look at the charts. First, a chart of the '29-'32 bear:

Obviously, history never repeats exactly. But this chart gives perspective to the size and frequency of rallies we can expect in this bear market. I am not ruling out a 50% rally from bottom to top that lasts 4-6 months. This would equate with the 200 month EMA and approximately a 38.2% Fibonacci retrace of the entire move from Oct '07-Mar '09.

On the weekly, we see how the Nasdaq 100 refused to make a new low early this month. What is this telling us? Either the Naz is going to lead us higher, or it has been hinting that all of the price action from November has been one big "expanded flat" pattern that will take us to new lows after surpassing January highs. Pick your poison.

Taking a look at crude oil, we see a "peek-a-boo" above the 20 week EMA. If we see a strong continuation downward from this level, a good argument can be made for new lows, or at least an end to this run-up. But if we can hold above the $50 level on a weekly closing basis, the $70-80 area should be a magnet.

The typical correlation over the last year has been lower stocks=higher dollar. But try to remember back a couple of years when it was common logic that gold and oil could only trade higher as a function of dollar weakness. That obviously wasn't the case. So be careful to automatically conclude that one means the other. Correlations tend to break once they become considered "common logic." The longer term timeframes look absolutely atrocious for the Euro and Loonie. First the monthly:

Notice how it hasn't been able to capture the downtrending 20 month EMA (blue line), but also has held above the 100 month EMA (purple), thus creating a wedge. A monthly close below 126 spells trouble. The weekly chart doesn't look much better. It was rejected on this latest rally at the 100 and 50 week EMAs. A close next week below the 20 suggests it is game on for new lows.

The Canadian Dollar looks just as ugly on the weekly. It hasn't even been able to capture the 20 week EMA. A short could be taken with a stop above 82. I still see the Loonie sporting a 6-handle sometime this year.

Sterling doesn't look much better. My call for par with the greenback stands. The UK is a mess.

The TSX Venture looks like it might want to challenge the 50 week EMA. It's a long way up. But if it pulls back hard along with the price of oil over the next few weeks, look out below. Using the two metrics could prove useful in determining the overall risk appetite for the major indices.

You might remember that I said there were two ways I typically "take a step back." One is to use longer timeframe charts. The other is to take some time off from the markets altogether. As such, I'm scanning the web for vacation opportunities. 10 days in the Greek Isles sounds about right! So if there's no updates for a few days, you'll know what's up. Cheers!

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EconStudent said...

Is there an ETF that I can use to invest in TSX Venture?

Matt Stiles said...


No, not that I'm aware of. I think most of the stocks are too illiquid to be able to put in a basket. Same reason that you can't buy an ETF for the pink sheets in the US. But you can go to and use their filter. From there you could probably find a number of the higher market cap stocks and create a fairly decent proxy on your own.

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