Daily Archives: August 9, 2010

Short-Term? Long. Long-Term? Short.

By -

A widely-read publication that tracks Elliott waves has, over its three most recent issues, stated up front that:

"A last burst of excitement has carried prices above last week's highs in what should amount to the final subdivisions of wave c (circle) of 2."

and, in the following issue……

"The wave formation as well as the accompanying technical condition continues to indicate that the rise since the first days of July is close in time to reversing."

and then, the next issue……..

"The wave structure of the market's near-term advance is very close to ending..which means a trend reversal from up to down in stocks. The next leg lower is fast approaching."

It all reminds me of a term from the software business that I learned back in 1990: "Real Soon Now" – which usually means, "probably before we have successfully colonized Mars."

This isn't meant to make fun of EW, but it certainly captures my frustration at the grind-the-bears-up market we've seen over the past 5 weeks.

I have postured myself thusly: I have a very, very large long position on the SPY, and I have 234 mostly small positions on the short side.

I do not intend to hold the SPY for more than a week – – I might even sell it tomorrow, but I will have to see about the Fed reaction. But the fact is that bears are absolutely at risk of another 50 points slapped onto the /ES, and I just don't have the intestinal fortitude to hold on to a 100% short position, which is 140% margined, against that kind of headwind. It will, psychologically, be very beneficial for me to have one very large position thriving in the midst of such a rise while I bide my time for the sake of my shorts.

It has been 22 months since the 1937-1942 analog dawned on me, and although I have failed to fully take advantage of that insight, the fact is that the analog itself hasn't missed a beat. But Fed days can be insane – – only the Lloyd knows what they might have up their sleeves – – and I'd like some insurance in my back pocket to carry me through.

Zooming Into the Analog

By -

Over the weekend, I printed out a bunch of charts and checked in with my 1937-1942 analog. It seems to be playing out as beautifully as ever. I'll share a couple of the charts here. This is a close-up of the period in the late 1930s that I am following:

0809-past

For me, 2010 is all about the move from "L" to "M". I don't know if we are at "L" yet – – it could be as high as 1170 on the /ES, which is nearly 50 points higher from current levels – – so there's plenty of room for the bulls to run before this analog is invalidated.

Below I've tinted in cyan the range where "L" may terminate. Because I don't know when it will happen, I am keeping stops very wide. Once we start falling, I'm going to hang on tight until about 925 on the S&P, at which time I will cover everything.

0809-present

Waiting for "L" is a drag, but no one is going to ring a bell an announce a nearly 20% drop is about to take place. I want to be ready for it when (OK, if and when) it comes.

How to Compute a Hedge (by mmTesla)

By -

This post will be dedicated to calculating your hedge using
the S&P 500 emini futures.

First order of business is to know how many dollars you are
up for the DAY. Let’s say for the sake of the example on Friday when the ES was
hovering on support around 1106 you were up an arbitrary number of $3,400
alright so from the close on Thursday which was 1124.5 and the current ES price
of 1106, is 18.5pts ES. $50 per point per contract so $925.

So we take 3,400/925=
3.67 contracts. When we used to hedge we liked to round down, and it is more of
a personal preference whether you would like to be slightly over or under
hedged. So if you chose to round up and used 4 contracts in this example and
decided due to how close we were to support, increasing delta, market internals
etc that you wanted to protect your gains. You would buy 4 contracts at lets
say 1106, and by the end of the day your hedge would have made
1119.5-1106=13.5, 13.5×50=675, 675×4=2,700. So instead of having 3,400 become
$700 in gains, you have locked in your $3,400.

As a general rule of thumb in this example IF you decided to
hold your hedge overnight due to fluctuating beta you would drop the 4th
contract and be holding 3. You can always drop your hedge pre-market, overnight
or during regular trading hours. So on one hand you are muting your gains but
that is a small price to pay for protecting profits, lowering risk and peace of
mind against gaps. When you hold overnight your hedge can be losing you money
but generally when the market opens your other positions will make up the loss.
But understand the risks of holding overnight!! Worst scenario would be you
held too much overnight and got a margin call because of some news that
happened while you were sleeping! So unless you know what you are doing don’t
hold overnight.

The other beauty about this technique in hedging is that it
allows you to practice day trading the futures for free. If the trade goes
against you, your other positions should make up the loss. So if you are net
short, then hedge by going long and taking every high probability signal to go
long. Worst that can happen in that scenario is the market continues down and
your other positions make up the loss. Although if for the flash crash for
example some stocks did not react very strongly to it so being hedged on the ES
could have hurt you. That however is an outlier event, that should be prepared
for.

NOW for the other side of this sword, some people will hedge
by chasing the market. That is a mistake because that will most likely lead to
you losing on your hedge and locking in muted gains. IF you plan on using this
technique I would recommend learning some day trading set-ups and studying the
flow of the futures market, and if it resonates with you practice hedging in
paper.

Anyways I hope this helps. I think Tim’s disclaimer also
covers his guest posters but if not, you are responsible for your own actions.

Still in the Rising Wedges (by Springheel Jack)

By -

A disappointing day for the bears on Friday, and the rising wedges on
SPX and EURUSD remain unbroken. Here's the updated version of the rising
wedge on SPX that I posted on Friday afternoon:

100809 SPX Daily Rising Wedge

I've tweaked the ES rising wedge to fit better with the rising wedge on
SPX. Logically this also fits better now as the ES low was an overnight
low not shared on the SPX:

100809_ES_Daily_Rising_Wedge

In retrospect it was a major tell on Friday that there was little
weakness on EURUSD, and that the rising wedge on EURUSD was not
threatened at all.

I know many don't believe that the correlation between USD/EURUSD and
equities is strong enough to trade, so I've marked up on the chart
below in red highlight where EURUSD has been in a downward wave, and in
blue highlight where EURUSD has been in a an upward wave. SPX is the
background to the chart in green.

My point here is just to show that in the last ten months, a period in
which SPX has made little upward progress, anyone who had been long only
when EURUSD was in an upward wave would be massively up, and anyone who
had been long only when EURUSD was in a downward wave would be
massively down.

Any significant retracement on equities will therefore be unlikely
unless it is accompanied by a downward move in EURUSD and identifying
the start that move is therefore of great importance regardless of
whether your bias is long or short:

100809 EURUSD Daily Wedges

There was some talk at the weekend about the bearish engulfing
candlestick on the Vix, but a bearish engulfing candlestick requires
that the previous candlestick be in the direction of the previous
(bullish trend). Friday's candlestick was a bid red candlestick after a
long downtrend, and immediately after a red candlestick the day before.
There was therefore no bearish engulfing reversal candlestick on Vix:

100809 Vix Daily Candlesticks

So where does this leave us? Exactly where we were on Friday morning
more or less. On EURUSD we are waiting for either a hit of the top
trendline of the rising wedge, now approaching 1.345, or a daily close
below the lower trendline of the wedge, currently slightly under 1.32.
On SPX we still have the strong resistance level at 1130, and the top of
the rising wedge is in the 1140 area. As the lower trendline of the SPX
rising wedge is rising at 5 points per trading day, it is at 1109 SPX
today.

Ideally we would see both SPX and EURUSD hit the top trendlines of their
rising wedges, as that would deliver the optimal short entry. That
won't necessarily happen though as both are up near strong resistance
levels. Either way both rising wedges are running out of road, and
unless they both break up, which rising wedges do 31% of the time, but
seems unlikely here given the overbought state of both on RSI and other
indicators, then I'm seeing the maximum that SPX can reach within the
rising wedge in the 1150 SPX area.