15 years ago – Page 36 – Slope of Hope with Tim Knight

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.

Let’s Think This Through

By Tim Knight - 15 years ago (07, Mar 2010 2:11:31 PM)

This is a very important – and somewhat selfish – post. I need your help, and I'm hoping you'll come through. But I think we might all learn something together. I'm going to leave it up for a good long while so I can get as much feedback as possible.

In spite of a horrendously rough month, my faith in charting – – the kind of charting I've been doing for decades and which I discuss in my book – – is strong. My charts haven't done me any damage. My judgment of market direction definitely has.

Generally speaking, my decision-making process has been a three-step approach:

(1) Make a judgement on the market's general direction;

(2) Assess individual charts and choose bullish and bearish patterns

(3) Load up on either bullish or bearish charts, based upon the conclusion from step (1)

This method worked marvels in 2008/early 2009. Even though the middle of 2009, it continued to work well. Even during the last six months, there have been brief instances (Jan 19 to Feb 5) where it has worked, but there have also been times (Feb 5 to present) when it's been devastating. In a market like this, the above "top-down" method isn't working consistently enough to keep. So I need a new approach.

Part "(2)", I am totally happy with. I'm a good chartist, and I think I can pick out bullish and bearish charts with the best of them. So this area – which is where I've got twenty years of experience – can remain.

It's parts 1 and 3 that need to get thrown under the bus, and I have three new approaches that are candidates for its replacement. I will tell you right now I do not judge all three of these as equal; there's one I really like, and there's one I don't care for, but I am going to try my best to excise my feelings about any of these three since I'd like unvarnished opinions. Oftentimes the comments section drifts off into other realms, but I ask that, for this post, let's stay on topic. Your aunt's recipe for Zesty Banana Pudding will have to wait.

So here are my three candidates, along with a brief description of each and, off the top of my head, the advantages and disadvantages for each. I could write a lot more about each of these, but I think you'll get the gist of it.

Candidate One: See-Saw

Assumption: That the market's direction, being unknowable, should not be relied upon as a basis for positions, and that the bullish/bearish configuration of a portfolio should simply be dictated, in a Darwinian fashion, on which positions "survive", adjusting accordingly.

Description: The simplest execution would be something like this: in a portfolio, an even number of bullish and bearish positions are executed, each of which is similar in size. Let's say 20 of your best bullish charts, and 20 of your best bearish charts. Stops are set and are updated daily. If a given position is stopped out, the trader is allowed to enter a new position on the other side. (Example: two bearish positions are stopped out; therefore, two new bullish positions are entered, yielding a mix of 18 bearish and 22 bullish positions). The mix "see-saws" either bullish or bearish, depending on what happens on a chart-by-chart basis.

Advantages:

+ Agnostic initially with respect to market direction

+ Intuitively, it seems to me that this is the most objective trending mechanism, because by its nature, it permits bullish (or bearish) positions to continue on their merry way, and it nukes losing positions (and permits opposing positions to take their place). So this seems to be a self-correcting mechanism.

Disadvantages:

+ Having equally-sized positions is troublesome. After all, does one want to have the same sized bullish position on something like SPY as they do a bearish position on some micro-cap stock? It also severely "collars" the size of the portfolio, because the small position is going to restrict the overall size. For example, let's say the most I wanted to risk on a particular position was $20,000, and I'm planning on having 40 positions (20 bullish, 20 bearish). That means a total portfolio of $800,000. That isn't going to do it. I need to be able to size for a much larger portfolio than that, but at the same time, I don't want to risk, say, $200,000 on some speculative issue only because overall portfolio size requires it.

+ It seems a method like this would be dangerous in a very choppy market. If, for instance, things were up one week, down the next, over and over again, a strategy like this would chop one into little pieces. It seems to me this method is best for markets that trend for at least a couple of months at a time.

Candidate Two: Cyclic Weighting

Assumption: The assumption here is that the market regularly moves above and below its moving average (for the sake of example, let's say its 50-day moving average) and, generally speaking, oscillates over time.

Description: This system would weight the portfolio from extremely bearish (a figure of -1) to extremely bullish (a figure of +1) – – usually somewhere in between – – based on the relationship of a major market index (like the $SPX) to its moving average. For instance, once the index has reached an extreme high vis a vis its moving average, the portfolio would be weighted highly bearish (perhaps 95% bearish positions and 5% bullish). If the index were exactly in the middle of its historic extremes, the split would be half bullish, half bearish. And, when the index was at a nadir relative to its moving average, the portfolio would have reached a point whereby it was almost entirely bullish. The portfolio would be in a constant state of change based upon the oscillation.

Advantages:

+ Makes the most of bullish moves from weakest points in index performance, and makes the most of bearish moves from strongest points in index performance.

Disadvantages:

+ Would suffer greatly in a trending market. So, for instance, if an index was at an extreme relative to its moving average, and it stayed there for many weeks, being loaded up on bearish positions would be harmful. Of course, the moving average would be in a constant state of "catching up" with its index, so bearish positions would be trimmed, but a market that is steadily trending up or down for long periods of time may be very disagreeable with such a system.

Candidate Three: The 80/20 Rule

Assumption: That, by and large, markets tend to go up, and while there is some room permitted for bearish positions, on the whole the assumption should be for asset inflation.

Description: The portfolio overall would have a weighting of 80% bullish positions and 20% bearish positions.

Advantages:

+ Simplest of the system

+ Over the long haul, this is the most in tune with broad market direction

Disadvantages:

+ Seems overly blind to market movement. If one remained 80% in bullish positions during 2007 and 2008, the bearish positions would have not be sufficient to fully counteract the damage going on.

I'm putting a poll below, so if you think any of these three is worthwhile, please vote for it. If you have a totally different approach that addresses this need for a "weighting system", please put it in the comments section. I am really looking forward to reading what people have to say. Thank you!

Weekly Sector Report: 03/05/10 (by Leisa)

By Leisa - 15 years ago (07, Mar 2010 9:00:01 AM)

(Note from Tim: I've got a pretty important post coming up a little later today, where I'd like you to help me think through a very important topic; please be sure to return, as I'm looking to Slopers to help me think through this; thanks).

It was a week of strong, forward movement in all of the 164 DJ US Sectors except for one–Water–which was down 2.1%. Here are the broad sectors, all of which were solidly positive (to the understandable chagrin of the bears).

On the weekly charts, I'm seeing several sectors that are making new highs, but the ultimate oscillator is not confirming. It's a divergence worth keeping an eye on. You can find the full report here. I did not include the Monthly charts. I will update those at the end of each month.

Data courtesy of Stockcharts; compilation courtesy of me.

Jumping the Creek (by Fujisan)

By Fujisan - 15 years ago (06, Mar 2010 8:44:23 PM)

This week was totally phenomenal in many ways, and I was overwhelmed by the market reaction. I guess the market was celebrating the 1st anniversary of the crash 09??

Gartley Pattern Update

First thing first – let me give you an update on my Gartley Pattern. In my last week's post, as a part of the bullish scenario, I documented as follows:

"Now, someone asked me what would negate this Gartley pattern and here is my answer: if the market closes above Feb 22's high, then, the market will most likely come to retest the recent high of Jan 19."

As of March 1st, SPY closed above Feb 22's high, and therefore, Gartley pattern is no longer valid and I'm expecting the retest of Jan 19's high.

Jumping the Creek

One of the reasons that I found this week's market movement "phenomenal" is that SPY was breaking above the major trend line as follows:

Here is a close look at the SPY daily. It's been a known fact that this market has been very "gappy" – i.e., it has a tendency of gapping up or down whenever the market approaches the major resistance area. This was one of those "jumping the creek" events.

SPY Three Drives Pattern

As illustrated below, the first upside target is 115.94, and if SPY is able to maintain the current upside channel, this could be developed into the "Three Drives Pattern" with the next upside target of 120.15. At the same time, it could also come back down to fill the gaps before heading higher. We just need to watch the market closely to see which way to go. As the OPX (Option Expiration) week typically is a bullish week, my bias is more toward the upside than the downside, which would give more probabilities of completing the three drives pattern.

SPY Bear Call Spread March 116/117

Here is one of the examples for March OPX play. Once SPY reaches the price target of 115.94, you can sell March 116/117 credit spread as follows:

Risk = $60 (stop at $116.42)
Reward = $300 (exit at $113.40)
Risk/Reward = 500%
Return on Investment = $300/$580 (max loss)

This trade could possibly be completed in three days (entry on Wednesday, Exit on Friday)

Alternatively, if you believe that SPY expires below the short strike price of $116, you can hold on to your position for a maximum profit of $420.

Three Peaks and Domed House Update

Another reason of the market's phenomenal move this week was the resolution of the "Three Peaks and Domed House" pattern.

As discussed in my Oct 09 post, the INDU monthly chart is forming the Three Peaks and Domed House" pattern as follows:

INDU DAILY Chart

Likewise, as discussed in my last week's post, the INDU's daily chart is forming the"Three Peaks and Domed House" pattern as well, Here is the INDU's daily chart.

INDU MONTHLY Chart

Now, watching this week's market price movement, I feel like I found an answer. If both daily and monthly charts are forming the identical pattern, why can't we expect the same results in both cases?

EUR/USD Three Drives Pattern

If there is any correlation between the Euro currency and the equity market – which doesn't seem to be the case at this moment, there could be a possible turning point once this pair reaches the other side of the channel and heading south once again. I'm expecting a possible turning point toward the end of next week as it took 16 trading days of sideway consolidation back in Dec 09. Does this currency pair trigger a selloff inot the OPX week? Let's see…….

Spring has come to Seattle and we see many cherry blossoms. Have a wonderful weekend, everybody!

What Have We Learned?

By Tim Knight - 15 years ago (06, Mar 2010 10:53:55 AM)

One solid year of an up market, and one solid month of the most agonizing trading time I've had in my entire life, have put me in a deeply reflective mood. Even though the January 19th high has not been violated (yet), I am having deep doubts as to my long-term outlook on the market. It seems to head higher, regardless of external news or realities.

So what has the past year taught us? I have some thoughts on this; and although these thoughts may seem grumpy, snarky, or even whiney, I promise you, they are not intended to be. Cynical? Yes. Despairing? Sure. But complaining? No. Complaining about reality is pointless. So here's what I think the world has learned:

1. Investment banks can, with few exceptions, act with impunity. Yes, Lehman and Bear are gone, but that's just a sliver of the investing banking world. By and large, investment banks entered into the crisis as winners and exited the crisis as even bigger winners. They now know there really is no consequence for negative outcomes. If they win, they keep the profits; if they lose, they will be bailed out. End of story. So I think that, far from being chastened, banks have been emboldened to act in a manner that makes 2007 look like doe-eyed innocence.

2. Financial reform isn't going to happen. Whatever gets passed is going to be feeble. Maybe they'll pass a bill demanding that disclosure statements on credit card applications be in a font size two points larger than before, but that's about it. All this Volcker rule hub-bub is only going to compel the Goldmans of the world to dispose of their classification as bank holding companies, now that the need to be in that category (with its benefits) has passed. The panic is gone, so the motivation for real change is dead.

3. Real estate is doing just fine. Think real estate is in trouble? Ask the holders of SRS how their investment is doing. Real estate isn't going to be permitted to fail.

4. The financial industry is doing fine. Disagree? Check in with holders of SKF. They, as with SRS holders, are holding on to securities at lows never before seen in history.

5. Keynesian "economics" works. On the rare occasions a government faces a crisis, they just have to "print" (well, electronically create) trillions of dollars in "money." Bang! Problem solved.

6. Buying as many stocks as you can during times of panic is like legally stealing money. Gobbling up stocks – any stocks! – a year ago was a brilliant move for those who did it. The old saw about buying when there is blood running in the streets surely has held true.

7. It's much easier being a bull than a bear. The reason is simple – – pretty much all the vested interests in the world are on your side. You don't have to fight the tide all the time. Nine years out of ten, you're going to be right.

8. The unemployment rate doesn't matter. About 10% of the public has no income, and about 20% is underemployed. Obviously it doesn't matter to equities. The government will just keep printing up unemployment checks (no matter how many extensions are required) to keep things civil.

9. The US dollar is a one-edged sword. If the dollar is weak, equities will explode higher. If the dollar goes down, it doesn't matter.

10. The citizens of the U.S. love buying stuff. It doesn't matter if they need it, or if they have the cash on hand to afford it. This is the national pastime, and it's never going to end.

To a person like me, who is rational to a fault, and who loves free markets, these cold realities are depressing beyond imagination. But I'm not an idiot; I can see what's going on, and it's time to face the facts.

Have a nice day.

2004 to Scale (by nummy)

By nummy - 15 years ago (06, Mar 2010 1:50:23 AM)

So can the 2004 scenario be thrown out the window? I'm arguing not yet. Why? Let's look at the move in relative terms.

The retrace in 2004 was 20.32% of the SPX move from the March lows to early 2004 highs. The subsequent retrace upward was 83.36% of the move down.

What do we have now?

Currently, SPX retraced 21.91% of the move from the March 2009 lows to recent highs. We should expect today's retraces up/down to be slightly larger than the moves in 2003/2004. Market moves today seem a bit magnified compared to 2003/2004.

So, the recent retrace down (21.91%) was 1.08 times the retrace down of 2003/2004 (20.32%). Let's assume the subsequent retrace upwards should also be 1.08 times the retrace up of 2003/2004. We get the following interesting results:

If we make a new high next week, then this 2004 analogy can be discarded, but since the sentiment out there is extremely bullish, I took a small short position at the close on Friday.