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.
Estee Lauder Broken Trendline
One of the nicest examples of a stock that has "tipped its hand" and revealed just how sharply it can fall is Estee Lauder (symbol EL). The chart below shows that, after quintupling in price, it broke a cleanly-defined trendline and, more importantly, clawed its way back just to the underside.
I shorted EL on Friday, and although this chart (from pre-market) doesn't reflect it, the stock tumbled over 10% today. The beauty of these is that the "claw-back" to the trendline provides a very clean stop-loss point, thus offering a beautiful risk/reward ratio.
Vix Buy Signal Confirmed (by Springheel Jack)
It won't be as reliable in a downtrend but the Vix Buy Signal (for equities) that was triggered at the close on Thursday was confirmed at the close on Friday. These have been a very reliable indicator for a decent rally in equities, and that makes me more confident in my expectation that we are going to see a retest of strong resistance in the 1240-60 area before the next equities decline:
That retest is suggested by the diamond bottom on SPX last week, which has a target at 1243. I posted that on Friday morning and you can see that here. That's a reliable pattern, though the trend is down, and bull patterns are more prone to fail at the moment as a result. In the very short term the key obstacle to seeing further upside is a strong resistance trendline on ES, which was just a possibility on Friday morning, but was greatly strengthened by two touches on Friday afternoon. If we are to see a continuation of the current rally this week then that resistance must be broken. On this ES chart it's worth noting that the hourly 200 SMA was resistance on Friday afternoon and is now support. If we're going up today I would expect that should hold and a break below it would look bearish:
On EURUSD I'm watching to see whether it can manage a decent rally from here. It has broken back above 1.427 overnight and I'm seeing significant declining resistance in the 1.435-6 area. A break through that resistance would open a path to retest the last high at 1.454:
That's it for the short term charts today. There's nothing to add to that really as ES / SPX will either get past resistance or not, and I have some interesting long term charts I'd like to share. The first of those is the SPX weekly chart from 1990 (log scale), where a trendline drawn from a low in the 1995 looks very interesting. A very thought-provoking chart:
The other charts have a look at crosses of the 13 & 34 weekly exponential moving averages since 1980. These EMAs are crossing at the moment, and it's worth a look to review how well these crosses have performed in the past. The first thing to say is that the EMAs have not yet crossed, and that a kiss of these EMAs has in the past marked a low as often as they signalled a bear market. A cross with some conviction will be required for bear market confirmation. If we see that then these crosses have been very good indicators for a bear market in the past, with early crosses in both the 2000-3 and 2007-9 bear markets. Here's how that looks since 2000:
I only have SPX data on stockcharts back to 1980, and obviously this includes the most powerful secular bull market period in history between 1982 and 2000, so the period I am reviewing today is heavily biased towards towards bull markets. In the 1990s there was one cross with confidence in 1990 which was well before the low was made that year and there were two marginal crosses in 1994 and 1998:
In the 1980s there were crosses in 1981, 1984 and 1985, all three of which correctly signalled bear markets well before the lows were made:
I'm bullish today on a break of 1190 on ES. Until then I think there is a very significant chance of a sharp pullback in the short term, with significant support at the hourly 50 SMA in the 1168 area.
The Coming Hard Landing of China
China is a success story told many times over. It’s economic miracle has been the stuff of folklore. There are investors out there who think that China will keep growing forever. The commodity speculators love China. Be it oil price or copper, any spike in price in any commodity is attributed to the insatiable demand from China. But behind the obvious, there is another story. For those who are willing to question the fairy tale story, it is time to short China.
Let us start by looking at the socio-economic model of China. The communist party of China has ruled the country with iron hand for over from 1949. The political elite of China want to avoid any social unrest and upheaval at any cost. They have an unenviable task. They have to provide enough work, food and shelter to the millions of ordinary Chinese. Being a command economy means there is no free market. The local purchasing power is insignificant compared to the western world. In order to create work and alleviate poverty, the leadership decided to take the route of growth by export.
Today China is the manufacturing powerhouse of the world and the single biggest factor in the growth has been low labour cost. Companies from all over the world shifted their production base to China to take advantage of the cheap labour. With the result, western civilization lost jobs. But most of the wages that a Chinese worker gets is at a level that is just sufficient for survival. Millions of rural poor migrate to bigger coastal cities in search of work and live in deplorable conditions. The worst part of the deal is that the companies that produce goods for the world do so at a very low level of margin, average 4% to remain competitive. And now every country is trying to grow out of poverty through export. Irony is, not every country can be net exporter, and someone has to be net importer as well. And consumers in western civilization do not have the capacity anymore.
China imports all the raw materials from other countries, iron ore from Australia, Energy from Middle East, and Machinery from Germany and produce goods to export. When the world demand for the cheap Chinese goods plummet, as it will with the slowdown of the global economy, what will happen to the export oriented growth model?
After 2008, China decided to kick start its economy through construction. And they found it is the easiest way to keep people employed while projecting a growth of GDP. But creating assets which does not give income does not actually create sustainable growth. When, not if, the world economy slows down in the coming months and years, the available capital to continue such useless construction projects will come to a halt. Already millions of homes and cities are lying vacant across China. As if the sub-prime housing crisis is being played all over again in China, but with a much greater scale.
Over the last 40 years, there has been a growing middle class in China who are well educated and are demanding. Since the currency is pegged to US dollar, the QE in the USA is exporting inflation to China in the form of higher food cost. And unlike in America, food cost constitutes over 40% of the average household expenditure in China. So inflation is rising in China and China is now battling hard to control the price rise. This is causing huge social unrest and the Communist Party if uneasy about it. As a result, we are seeing a slow rise in the value of Chinese Yuan vis-à-vis US$. But this cuts both ways. While a rising Yuan will help reduce the cost of imported foods, it will reduce the profit margin of the exports and make them uncompetitive. More so in today’s week demand situation where the exporters do not have the leverage of negotiating higher prices.
There are talks about the huge Chinese holding of US debt and the threat they possess to US Economy. Actually it is the other way round. China has no option but to invest in US treasury and if they don’t, they would not be able to keep their currency down and be totally uncompetitive. If they want to sell the massive holding of the US Treasury bonds, they would push the prices down and lose money. So again, China is caught in a no win situation there. With the money fleeing Europe, there is no shortage of demand of US Treasury, at least for now. So US do not need China, as much as China needs US.
The demographics are another factor to be worried about China. With one child policy strictly followed by the party for so long, the average age of the population is growing and the country is graying. Moreover, because Chinese parents prefer boys to girls, there have been systemic abortions of girl fetus on a large scale for a very long period of time. With the result, the ratio of man and woman has been totally skewed. In some places there is one woman for every two men and poor migrant workers cannot get wife for the love of their life.
Central command always fails. The asset allocation in central command economy is not based on efficient use but what the part leaders think best. And few people cannot decide what is best for millions. Corruption is rampant and so are the red gift bags. Even the death penalty does not deter the local authorities much. The end result is something other than desired.
The bubble is about to burst along with the global debt deleveraging and the popping sound will be heard loud, far and wide for many years to come.
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Ratios and Symmetry (By eMiniSchool.com)
In the last posts we were noting the symmetry levels on the support side of the market. The ES,TF, and DOW all came down and hit the symmetry support but none of them closed below the support levels. The only one that did not hit the symmetry support was the NQ (it came close).
We received emails saying we were crazy for putting out support levels as the market was falling and how "this time" the market is different so the levels do not mean anything. It seems like every time the market starts to try to make a top it is always "different" from before but in reality it is no different.
If you look at the charts above we noted the symmetry going up. We did this so you can see how the calculation has worked in the past. It is up to you if you want to follow the levels or ignore them but you will see using the calculation it would have told you where the turning points were. These turning points are part of how we get symmetry for the entire pattern.
The top chart is the last high. Going from the 09 low there was 55 bars up (55 is a important number). From that high we pulled back and from that low we went up 36 bars. Divide those and you will get 1.5262 then divide that by two (Two Waves up) and you will get .763 and you will see how the last high was at the .763
Go to the bottom chart and we broke down that first leg into two minor waves. First leg up 29 bars and the second leg up 35, divide those and you will get 1.21 and divide by two and you will get .605% and you will see how that number picked the high in April 09'.
We cannot say for sure that the symmetry support where we are now will hold forever and it is not there to tell us that but it is there to tell us if the trend is still true or if it has changed and now is false. If the up wave becomes false that is when we get a true trend reversal.
There is minor and major symmetry and the last posts on our blog are noting the major symmetry levels. If we bounce up from where we are now and then fail to take out the high and roll back over we will be breaking symmetry support and fall to the inverse of symmetry. If you go back and understand how to get the calculation you will see it picks it almost every time.
We also used this in our AAPL timing Video here: http://eminischool.blogspot.com/2011/07/aapl-timing-video.html
To get the symmetry support on the markets use this link and go back through the last couple of pages and we have noted all the markets. http://wwweminischool.wordpress.com/ ( we will update the levels again tomorrow night on the wordpress blog)
Happy Trading,
www.eMiniSchool.com
PS. If you take the first 605% and the second .763% and add them together you will get 1.368 then divide that by two you will get .684%. Take that and divide it again by two and you will get .35 which is the average symmetry support for all the markets right now.