13 years ago – Page 2 – Slope of Hope – Technical Tools for Traders

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.

Small Caps

By Tim Knight - 13 years ago (30, Nov 2009 7:50:11 AM)

I confess that yesterday's not-too-surprising announcement from Dubai that everything would be juuuuuuuuust fine had me a bit concerned, but it looks like the damage is here to stay. In particular, I am still madly in love with small-cap shorts. Even as most indexes and commodities are thrusting slightly higher, the small-caps have been reliably weaker. I have doubled my position in SDD, the ultra-bearish small-cap ETF. Below is the IJR, which nicely illustrates the set-up for small caps on the short side.

Required Reading

By Tim Knight - 13 years ago (30, Nov 2009 7:11:35 AM)

I enjoy non-fiction quite a bit, and the latest tome I'm going through is Sorkin's Too Big to Fail, which is a nearly 600-page book about the summer and autumn of 2008. Since most of us here lived through that time (some of us, tick-by-tick), it's absolutely engrossing. I'm only about 60% of the way through the book, but I'm really enjoying it.

Back in the Saddle

By Tim Knight - 13 years ago (30, Nov 2009 6:20:22 AM)

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)

By Fujisan - 13 years ago (29, Nov 2009 10:34:48 AM)

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.

EUR/USD

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.

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.

USD/JPY

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.

GBP/JPY

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, Forex.com, 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

By Tim Knight - 13 years ago (29, Nov 2009 4:21:02 AM)

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.