Slope of Hope Blog Posts

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Harmonic Convergence

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Howdy Late Night Slopers………

Actually, by the time I put up something new, it'll be well into the morning, so perhaps that salutation has a short shelf life.

I just finished a nighttime swim, and as afflicted as I am with blogger's guilt (that is, feeling bad about not posting more frequently today……..some blogs that shall not be named are not affected by this syndrome……cough cough) I wanted to put up something fresh.

I'm struck by the "convergence" of data swarming around the notion of a hard fall somewhere around August 1st. Namely:

+ The Arch Crawford "Cardinal Climax" that's been mentioned here a few times;

+ The very plausible prediction laid out this morning by Springheel Jack;

+ Most importantly to me, the final culmination of the WAG, which calls for a hearty fall down to around 875 on the S&P, which will be the best (and pretty much last) hurrah for the bears in 2010.

I like it when diverse perspectives line up like this. If we actually see a hard tumble anywhere around this date, I think it's time for some cheers (and deeper exploration).

For myself, I remain entirely short, and I've scared up a few dozen more opportunities that I'll short Thursday, if the conditions are right.

I'm going to get some sleep. I'll see you Thursday morning.

0721-TimSwim

The ES Forecast (by Springheel Jack)

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I've been on a roll recently. I forecast the low near 1000 &
predicted a likely rally to the 1070 – 1090 ES area. Once there I called
1099 as the likely rally top and this week I predicted on Monday
morning that we'd most likely start the week with two days of rally with
a likely target at 1084.5. Not bad going, though I'm not expecting to
match that performance all the time of course.

For the low target I was using a rough declining channel on SPX, for
last week's high a rising channel from that low, and yesterday's high
has been a key support / resistance level on SPX for quite a while now.

My main tool for assessing likely immediate market direction was Alex
Grant's excellent ES
forecast
, which he sends to his subscribers by email for a very
reasonable $30 per month. I've been checking it regularly since he
warned his bearish blogger friends last year that the ES forecast was
predicting a sharp rise off last July's low lasting for several months.
Alex has given me permission to publish his current daily forecast here
and so here it is:

100721 ES Forecast

The forecast is a mechanical forecast using Alex's proprietary
indicators, and reverses sometimes, so that it then does the opposite of
what the forecast predicts, but as a tool for assessing likely market
direction I rank it very highly, as I know that there is no such thing
as an infallible crystal ball for market trading, and if there was, I
wouldn't be expecting to get access for $30 per month. The targets given
on the forecast are also very rough, so I tend to use my own channels,
patterns and support / resistance levels to call these.

If you're interested in subscribing yourself the link is here.

As you can see the ES forecast is now forecasting a strong bearish tilt
for the next few weeks taking us into the 900s, which as long as it
doesn't reverse direction of course, gives us the likely timeframe to
play out the bear scenario if it is going to play out.

That fits my overall bear scenario on the SPX daily in which we are back
at the top of the main SPX declining channel:

100721 SPX Daily Bear Scenario

This gives a model short entry here in my view, with potential
downside here of 220 ES/SPX, and a stop at 1101 ES as that would be a
break above my SPX declining channel, and would also deliver the bulls
their higher high to go with their higher low, though only a break of
the June high would finish off the summer bear case altogether in my
view.

As for today you can see that the ES forecast is projecting sideways to
down over the next few days, and we may fill intraday the open gap at
1093 ES. I had a broadening bottom on ES yesterday that broke up with a
target of 1103 ES, but only 59% of these make target, and I'm not
expecting to see last week's high broken:

100721_ES_60min_Broadening_Bottom

That isn't to say that it won't be broken of course, the risk/reward is
very good for a short entry here with ES at 1087 at the time of writing,
but the bulls are still in with a good chance and the indicators I
watch are very mixed on market direction at best.

'Dr Copper' has a scarily bullish chart, and I was disturbed to see that
break up through resistance this morning. Here's my take on that:

100721_Copper_Daily_Channel_and_Patterns

Recent action in long term bonds is solidly (equity) bearish of course,
but EURUSD up from my broadening descending wedge last week and has't
reached my obvious next target near 1.32. It is retracing at the moment,
but that may just be a retest of the broken wedge upper trendline near
1.27:

100721_EURUSD_Daily_BD_Wedge_Broken

Oil and CADUSD have also had bullish breaks up this morning and AUDUSD
is testing a key resistance level. The bulls are still in with a very
real chance here, but I'm not expecting last week's high at 1099 ES to
be broken, and until it is, I'm expecting us to fall hard from here over
the next few weeks.

If not, we should know very soon and I'd be out or considering exit
strategies on all shorts at 1101 ES.

The Emotions of Risk (by Leisa)

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One book that I frequently recommend is Justin Mamis' The Nature of Risk: Stock Market Survival and the Meaning of Life (1). I believe this book to be foundational to new traders because it discusses, what else?, the nature of risk in the market. What I love about Mamis' book is the unique way that he writes about market risk, and the way that he juxtaposes two seemingly opposing ideas, that are not in opposition at all. From that juxtaposition he illuminates. (Read on for an example). Given some of the conversation at the Slope, I wanted to do a brief post on some of his concepts from Chapter 6, The Emotions of Risk. I think that some will find some resonance. I particularly wanted to share some of these concepts that might engage your brain into thinking about risk differently. Mamis posits:

"Under pressure, emotions determine our action." (p. 72)

Because risk is typically defined as a peril, fear is one of the primary emotions. "Fear is long-term, an underlying pervasive emotion, like the underlying primary trend of a bear market. It doesn't go away until it changes." (p.73) Mamis makes a simple, yet powerful, statement about the pervasive fear needed for stocks to go up. Yes, you read that…to go up. For there to be buyers, there must be sellers. And it is the fear of the sellers that creates the proverbial wall of worry to provide supply for those who have a different perception of current market risk. He also notes that the operative portion of fear is anxiety. Anxiety is what paralyzes and prevents you from taking action. It is this anxiety that "gets in the way of taking a risk."

The flip side of fear is the emotion of greed. The operative emotion of greed is envy. Mamis notes that ". . . whereas anxiety paralyzes, envy cause one to act. . . " It is difficult to see the spectacular trades/success of others, and not feel a small bite from that evil twin of jealousy, envy. Envy can cause very risk behavior which is simply, "the risk of 'denial of risk'." Both greed and anxiety often lead to doing the wrong thing. My sense of this wrong thing is "inertia." : failing to buy when one should buy; failing to sell when one should sell.

These emotions and their operative manifestations into our action (or inaction) govern all market participants. The emotional impetus for buyers/sellers is reversed in bear/bull markets. Regardless of the market participant regalia you dress in each day, it is best to understand both your own and others' motivations and perceptions of the current risk environment. Mamis' book came along for me when I was feeling 'inertia'–that inertia having been brought about by the overwhelming need to have more information, more certainty, more sense of direction. Granted, there is nothing wrong in standing aside when there is great murkiness…but my inertia was spanning a time when there was some market direction, but my emotional state prevented my seeing that. Providence must have set this book into my hands, because it helped me come to terms with that inertia.

As market participants, we have to balance the two opposing points off view of being free enough to take risk and while not falling into the trap of 'the risk of 'denial of risk.' I'm not going to leave you with that concept in a void. How does one find the right action in that balance?

We need, we crave, the trust and belief from others, but when information is insufficient we need trust and belief in ourselves. We need the discipline to accept whatever is available, and the experience to understand all the ifs, ands, and buts, and yet still take the risk: we need to be able to make the decision. (p. 79).

As with most things, the right-rootedness of these important concepts is discipline. My distillation is that we need discipline first to ensure that our trading/investing capital lasts long enough to give us the experience that we need to build mastery. Without experience, we cannot build mastery. It is mastery that produces intuition and insight, and those ultimately support our confidence. Mamis notes:

Discipline means choosing what to do unencumbered by the fear of making a mistake. Confidence means trusting our intuition and that what we 'see' is what we "know." (p. 80)

He closes his chapter with a question that I hope that all of you embrace as your own mantra for coming to terms with this concept of risk: "How do we create within ourselves the heroic condition of confidence wherein risk is not a danger but life?" (p. 80) I also implore (v. suggest) you to get this book. I promise you that it will make you think of and about risk in a way that you may not have considered previously. I particularly recommend it for any who are feeling inertia and feeling compelled to have more information, more certainty, more (this, that, the other) before forging ahead and making a decision.

(1) Mamis, Justin The Nature of Risk: Stock Market Survival & the Meaning of Life. Flint Hill, VA: Fraser Publishing, 1999