Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Back in the Saddle

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I'm back in my beloved Palo Alto and ready for a new week (without holiday interruption!)

Dubai's pledge to pour in however many tens of billions of dollars are required to shore things up has had a rather temporary effect. The /ES is up precisely zero points as I am typing this, having been up more than seven earlier. And, as I grab a bite of breakfast, I shall share with you an amusing notion that popped into my head this morning from an Accenture advertisement I remember seeing………..


Welcome to the Forex Market (by Fujisan)

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SPY Weekly Update
In my my Nov 7 posting, I mentioned that we will be in this trading range for another 3 weeks, and 3 weeks later today on Nov 28, SPX is still trading sideways for almost 13 days in a row (this is the record so far in this rally) and not much has happened.  As I'm following the three drives pattern, I'm still expecting the market to come down to complete this pattern toward Dec 2~4 time frame.
SPX Monthly Chart
I have expressed my long-term bullishness in one of my previous postings Three Peaks and Domed House  and this becomes even more obvious if you take a look at a monthly chart.  No matter how you look at it, this rally only has a "single leg up" since March; meaning every monthly candle made a higher high.  This indicates that, there will be AT LEAST one more leg up after a retracement.  This is one of the reasons that I don't think we are anywhere near the top.

Why Trade the Equities? 
Trading the equity market has been pretty tough for the past many months.   The biggest challenge that I see is the "routine" gap ups and downs, in addition to a week-long sideway topping pattern.   This creates a very difficult situation for many day traders; namely
   a.  By the time the market opens, most of the significant price movements have already been made.  We are typically left with the sideway moves for the rest of the day.
   b.  When it gaps up/down against the current positions, it could take out the stops at a worst possible time, and moreover, you may not be able to get out at the pre-calculated exit price. 
In addition, the moment the market takes out the previous high, it often turns around and drops back down.  Whenever we thought that the market was going to drop, it then turned around and went higher.  We have been whipsawed so many times and we all learned that holding the position overnight may not be a good idea.
However, the only way to make money in this market is to hold on to the position overnight and/or over the weekend.  In fact, almost every single Monday for the past 3 months is a gap up open, which forces the short sellers to cover their positions every Monday, which in turn fueled the market to the upside.  However, it's very hard to go long at this level as the market was going too high too fast.  But if you go short, you could get stopped out at a worst possible time.  What can we do???
There are many things we can do, and the most obvious answer is DO NOTHING.  Maybe this market is not worth trading.  We should preserve our capital and mental sanity and wait for the right moment.  We don't need to be in the market all the time.
The next thing we can do is to trade the futures.  In fact, I have been trading the futures much more than the options these days because of the gap away market.  Position trading is becoming very difficult  unless you could time the exact market turns.
Last but not least, and this is the topic of this week, is to trade the currencies.
Trading Forex
Ever since the fallout of the notorious H&S pattern back in July, I have been trading forex much more heavily.  My favorite pairs are GBP/USD and USD/JPY pairs and they treated me so nicely in the past.  TA still works quite nicely, and we don't need to worry about the gap away market, and believe or not, "buy and hold" (or should I say – sell and hold) still works as long as you follow the trend.
Here are some examples of my currency trades.  You would be amazed how straight-forward these trades are compared with trading the major indices.
I don't trade EUR/USD pair – it's too choppy to trade (just like SPX), but I keep track of this pair very closely because of the correlation to the US equity market. 
This was my price projection back in July 31 upon the breakout of the bull flag.
Eur Aug 
This is what it looks like right now.  Mission almost accomplished?
Now, if you look at the weekly chart, you can see how close this pair is coming to the previous high of 1.6038.  Once it closes above 78.6% fib level, there is a very high probability that this pair would come to retest the previous high.
This was my price projection back in July 31.
This was Sep 13 chart:
This is what it looks like right now.  As USD/JPY closed below Dec low, this pair will be very likely coming to retest 1995's low of 79.75 in the near future.
This is what I posted as of Nov 17.  GBP/JPY was forming a very tight triangle on a daily chart.
Here is what it looks like now after the breakout of the triangle.  If you set up a stop right at the high of the daily candle and enter upon the break of the low of the daily candle, the risk/reward is totally phenomenal.  While SPX was going through a sideway movement, this pair has made a whopping 1,000 pips move in a matter of 7 days!!  In the mean time, EUR/USD has made only 20 pips price movement during the same time frame.
Here is a long-term view.
How to get started on Forex?
If you like to get started on Forex, here are something you can do.
1. Open up a currency account with the existing brokerage firm, if they have one.  If not, check out the forex brokers like FXCM,, etc. 
2. Open up a micro account so that you can start trading in 1 lot.  1 pip in 1 lot is $1 move in USD/JPY pair.
3. The biggest trap in trading forex is the leverage.  If you have never traded any high leveraged financial instruments, please trade small.  You can open up an account with $1,000, and once you double your account balance (i.e.,$2,000), you can gradually increase your lot size. 
4. I would start risking 1~2% of the entire account.  If you are starting out your account balance with $1,000, please make sure that you won't risk more than $10 at a time.  This way, it would take at least 100 consecutive bad trades to wipe you out entirely.
5.  Find your favorite pairs and trade it again and again.  This way, your trading success would be so much better than trading various pairs.

What Friday Was Like

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It's late Saturday night as I am typing this, and I finally have a chance to say a few words about Friday's very interesting session.

I got up very early Friday morning, at about 3:30 a.m., and I felt well-prepared for the day. I was thinking to myself it might make sense to dump half my SKF position and all my TWM position immediately at the opening bell, but that would violate my "30 minutes" rule, so I decided to hold tight.

As my post from Friday morning indicated, I expected a pullback on the /ES to about 1082, and then a fall. Well, we got a pullback all right, but it just kept on – errr – pulling back. So although my initial paper profit at the opening bell was huge, it started to wither almost immediately. I cried "Uncle" and got out of all my TWM (which I had bought Wednesday) and about 30% of my SKF positions. Both were handsome profits, but they definitely would have been better at the opening bell.

So holding on tight during Friday was quite interesting. As I said, my maximum profit was at the opening bell ,and by the peak of the bulls fighting back, 60% of those profits didn't exist anymore. So, at that very moment, the day was still sensationally profitable, but when it was two and a half times more profitable earlier, it kind of stings. But I am not in these positions to whimsically bounce in and out.

The kind of cool thing is that I decided at this pain point to actually take on a big position in SDS and another big position in DUG. The market started to turn back in my direction, but I had to get in the car and head to the airport. So, on that incredibly exciting market day, I had to walk away from my screens.

When it all ended, the /ES looked like the chart below. The tinted area represents what I consider the topping pattern, and the green tint represents my "didn't expect that" area. As you can see, the market slipped away somewhat from its push higher, although it still closed far above its night-session lows.


But here's the cool part of the story – – – – I didn't get a chance to see where my portfolio wound up until Saturday morning (!) So although I had a sense that, in the end, my profit for the day wouldn't be down 60% from its opening bell peak, I had no idea what the final tally was. When I finally got it, I was delighted – – – I was up for the day about 80% of what the opening bell profit was. That was particularly gratifying for me since the market actually didn't slip that much farther from its intraday peak, so it confirmed that I was in some really good positions. The bottom line is that it was far and away the best daily profit I've ever had in my trading career. So I was delighted at our little half-session!

It also just occurred to me before writing this post that I hadn't checked on my 401-k account. I believe I mentioned that I put 100% of my 401-k into the ultra-short (on the small caps) mutual fund with the symbol UCPIX. Here's a line chart of its progress, with a tint showing my short-term target.


Lastly, I took on a new position in DZZ on Friday (which is down about 1% from what I paid for it). This is the ultra-bearish-on-gold ETF. I am learning to fear gold on the short side a little less, largely because gold bulls I respect – Gary Savage in particular – believe we're in for a reasonable pullback. The other thing that is striking to me is the volume – – just look at that volume has been steadily pushing higher.

So, naturally, the big question is – – – what does Monday hold? I found it hilarious (and predictable) how the big web sites were all chalking up Dubai as utterly unimportant in the grand scheme of things (although if the news were bullish, I guarantee you they would be ringing the bell about what a vital indicator Dubai was). But remember this – – – in 2007 and 2008, the shots across the bow were things like obscure hedge funds no one had ever heard of blowing up. And what word was used again and again, as little bits of bad news crept out? "Contained" It was Bernanke's favorite way to explain away the subprime mess: that it was contained.

Well, none of it contained, and I'm sticking to my plan. I remain 100% short and plan to expand the size and quantity of my positions early this week.

ISEE Red Candles

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Hello Slopers – Mole here from Evil Speculator

The following post was actually written on Thursday morning during which I was blissfully ignorant of the deep hurting experienced globally and on the index futures side. The reason I'm re-posting those charts here is that I believe the ISEE data collected and put into proper context is incredibly accurate and should prove to be extremely valuable going forward. 

Okay, so I lied. I was planning to completely forget about trading during the long Thanksgiving holiday but then I ran into this chart this morning and just couldn't help myself:


This is the equities only portion of the ISEE chart. In response to some of the pitfalls in the traditional put/call ratio the International Securities Exchange (ISE) publishes their own modified version called the ISEE index. Unlike the old school p/c ratio the ISEE filters out trades from both market makers and broker/dealers. The ISEE further differentiates itself by using only opening long trades in it's tabulations.

As such the ISEE presents a much clearer picture of how retail options traders are positioned. The ISEE also uses a different equation than the regular p/c in calculating their index. To formulate the ISEE, the exchange takes the modified call volume, divides it by the put side and then multiplies the result by 100. Hence the ISEE is always a whole number.

With a normalized p/c equation a higher reading symbolizes greater put activity to calls while the ISEE formula generates higher readings if call buyers outweigh put buyers. So while a traditional p/c ratio of .75 would mean more puts than calls an ISEE value of 75 is the exact opposite. Like the CBOE the ISE also offers updated calculations of their p/c index several times an hour.

Okay, now that we're all on the same page you might get an idea where I'm going with this. The high spikes I highlighted mark extreme ISEE readings above 230, which just so happen to precede turning points by a few days. Now, let's correlate these spikes with daily candles on the SPX:


As you can see the ISEE spikes precede turns by a few days, but they are very reliable. Hey, I prefer a few days early than a few days late. What's particularly notable is the 247 reading last Tuesday, which is the highest as far as I can see back. It was followed by a 241 close on Wednesday, which would be a strong reading on its very own. So, chances are that a significant market decline is imminent, and it is most likely only a few days away [again, I had no idea what was happening while I was typing this – LOL]

We now again find ourselves at highly overbought conditions coupled with wide-spread divergences across various averages. Gold and other precious metals were up, with oil and natural gas down as well as the dollar down. The inverse correlation between the dollar and equities are beginning to soften as new extreme down moves in the buck are not accompanied by equally strong up moves in equities. I think Chris Carolan said it best:

"The accelerating nature of the dollar decline and gold rally may finally have reached the point where any international earnings positives for stocks are outweighed by the downside of the obvious increasing monetary instability.  The markets look like they’re about to get scared again."

In other words – the dollar carry trade is running out of oxygen. I believe Karl 'No Slave To Fashion' Denninger made the same point just two weeks ago, and you might want to take a look at his latest update on the subject. Another strange new phenomenon is the VIX rising and falling in line with equities, which confirms Carolan's point that fear is creeping back into the market. All this suggests that conditions are now favorable for a market decline. You have been warned.

I have been quite verbose on the notion that the thinly traded rally of past few days was designed to further discourage the bears and to shake out weak hands. I'm sure that many traders simply gave up and cashed out as to not to suffer from further theta burn throughout the long weekend. I myself was very tempted but did not yield to my emotions.

After posting the above I got a bit excited and as I was too lazy to head to the gym during turkey day I decided to finally put together a proper ISEE chart on my own:

A little update – I got fascinated with the ISEE and worked all day to import the data into Excel – here are some follow up charts for you guys:


Now, isn't that a lot nicer? I have also highlighted all spikes above 135 and all drops below 100 in the past year.


Here is the ISEE 10-day MA version – the focus here is twofold: First we have divergences which seem to indicate that a medium term trend is running out of steam. Then we also have a pretty obvious channel to the upside, which seems to also be a precursor for turning points lately – it's actually more timely than the pure data as of late. You might have noticed that we have not pushed into the upper channel line this time around, so perhaps more upside is a possibility.


Now, before you complain that I only peddle my lukewarm charts from yesteryear here on the Slope – here's one I just posted over on ES. This is one of my own chart contraptions which shows me the NYSE A/D ratio during the daily session. It actually closed nearby at 1.79 today but what you might not be aware of is that it was at 0.05 earlier this morning, not that's not a typo. After the opening bell the futures went completely ape-crazy (damn, I can't really curse properly on this PG-13 blog) and traversed 20 ES points in a matter of 90 minutes. All the while the NYSE A/D ratio never pushed above 0.2, that's right.

Sorry folks – I just can't take today's snapback seriously. Of course there is a good chance we fill the gap on Monday – it's quite obvious that the boyz have become quite brazen and outright complacent when it comes to putting a floor underneath the market, at least compared with their Asian or European counterparts. However, long term – my dear Slopers – long term I'm looking at a market that's curling over. And you really don't need all these fancy tools above to see what's happening – a good old fashioned volume chart speaks volumes:


Quite obvious what's happening but I highlighted the pertinent parts for you guys – sideways or caving volume on up trends and rapidly rising volume during sell offs.

The events in Dubai are completely meaningless and should be faded – remember, the market never follows the news, it's the other way around. What happened in Dubai is merely symptomatic of a much larger problem which is not merely limited to the gulf region. As a matter of fact after a one year reprieve the U.S. mortgage industry is now again looking at a huge number of monthly mortgage resets (which will trigger defaults) in the CRE and private real estate sector. Which brings me to my last chart and perhaps the one you might enjoy the most:

The CS portion of this charting monstrosity shows what the freight train that's heading for the real estate market. I took the liberty to extrapolate the data with my own wave count. Print it out and keep it handy – either it will by my chart of shame (i.e. I was wrong) or it's the chart evil Mole will be remembered by.

Enjoy the rest of your holiday weekend.



Simplify, Simplify

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Suppose we repented.
Repented what?
Oh . . . (He reflects.) We wouldn't have to go into the details.
Our being born?
Vladimir breaks into a hearty laugh which he immediately stifles, his hand pressed to his pubis, his face contorted.
One daren't even laugh any more.
Dreadful privation.
Merely smile. (He smiles suddenly from ear to ear, keeps smiling, ceases as suddenly.) It's not the same thing. Nothing to be done.

I've decided to make a couple of changes in how I talk about my trading:

  • No more reporting quantity of positions;
  • No more statement of percentage- or dollar-based profit or loss

I have a number of reasons for doing this. The principal reason is that, for my supporters, how many positions I have or how much I've made or lost doesn't add any value for them; and for my detractors (which consists of one particular unlikeable moron with almost no readers, no life, and no ethics), it provides fodder for derision. Because if I claim profits (as this morning), it is disbelieved, and if I claim losses, it produces chortles.

So it's a lose/lose, and since I'm a sensible chap, there's no sense in it. I'll just stick to tossing out trading ideas, goofy videos, and anecdotes.

Today is a very exciting day, but – irony of ironies – I'm going to spend most of it traveling, so I'm going to go mute for most or all the rest of the day (you know me, though; if I can find any opportunity for a new post, I'll do it – – – and, hey, guest posters, this might be a good time for you to step up!)

Be wise, keep your wits about you, and good luck today. Remember, the market closes three hours early (1 p.m. EST).