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.

Downside Targets (by Springheel Jack)

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It's a shame that I'm not trading much this week as I've really been nailing it the last few days. ES fell heavily in a trend day down and isn't far off the 1245-50 target I gave in my morning post yesterday. Here's how that broadening descending wedge is looking now:

On the bigger picture SPX is approaching rising support for the bull market rising wedge (and possible rising channel), which is within the larger strong support zone between 1220 and 1250. A fairly exact hit of this support trendline is important, as the trendline has only two touches so far and really needs three to confirm it. I'm not expecting a move below it. A move below 1219 would most likely signal the end of this bull market, but even if we are to see that this year, I'm expecting to see a strong bounce from this support zone first:

On NQ Brinkley at BlueChipBulldog posted a very nice looking declining channel yesterday which I have incorporated into my chart:

On TF the high this week has confirmed a matching declining channel on TF. The lower channel trendline is currently at 742, which looks overambitious, but a break of the upper channel trendline should at the least be confirmation that this down move is over as and when we see it. Two other things worth mentioning on the TF are the possible (but sloppy) continuation H&S that would target 753 if it plays out, and that as yet TF has not made a new low for this week, and is therefore not confirming the new lows on ES and NQ:

Vix broke up out of the 11 week range yesterday which is excellent news. I mentioned a few days ago that we should really see a break up on Vix before we saw a real low made and Vix is now out of both the range and the daily bollinger bands. I've marked up the two open gaps above from March as the obvious targets for this breakout:

EURUSD broke the H&S neckline yesterday morning and has made it over halfway to the 1.39 target already:

There is some support at the current level though, and I've marked that up on the XEU daily chart. There's a double trendline test here with rising support from the Jan 2011 low, and a retest of broken declining resistance from the 2008 high:

I have a slight problem today as there are so many interesting charts this morning. Anything over seven charts posted and Tim starts muttering darkly about posts that can be seen from space, so I'll just post the other two charts as links. The first chart is the oil chart, where the open gap support zone was filled yesterday, and the ugly H&S is now fully formed. On a break of 94 I'll be looking for a move to some big support trendlines in the mid-80s & the chart is here. Copper reversed where I was suggesting it should yesterday and I have downside targets at 400 and 395. The copper chart is here. 

After a trend day down we normally see some retracement and that's what I've been expecting to see today, though apart from some positive divergence on the 60min RSIs, there's little sign of that so far. If we do see that retracement today then ES could hit the wedge support trendline in the 1240-3 area tomorrow, which should deliver the exact hit of SPX rising wedge support that I'm looking for. We'll see how that goes today.

Bear Case and Historical PE Ratios

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From a Sloper this morning………

I know most Slopers lean towards the bear side, and for good reasons.  Many of of the reasons I have had for leaning to the bearish side has been proven over time to be false in the near term which has cost me dearly.  Longer term however, the truth is that no sustainable bull market ever began while the PE was over 20.  It will simply be difficult for me to become a bull until the PE fell below 10.  No sustainable bull market ever began without the PE dipping below 10.

What I have attempted to do below is to show what prices have done since the depression when the PE reaches extremes.  The top chart is the S&P and the bottom chart is the PE chart.  Obviously, when the PE’s are high it pays to invest in a much more guarded fashion while when the PE’s are low, it pays to become much more bullish.  

0530-1

Where would prices need to pull back to bring the PE back below 10?  When the S&P bottomed in 2009 at 666, the PE ratios bottomed at 15.  Assuming we are entering a new bear market now at the end of QE2, and the market drops over the course of the next year or a little longer, the next touch of the trend line would be somewhere between 700 and 750.  The chart below depicts what this could look like.
0530-2

Back in 2002, the S&P was around 800 and PE's were about where they are now in the 23.5 area.  My guess is that should prices come to the trend line, you will see PE's close to a bullish bottom but not quite.  It depends on how well you can interpolate the data.

ODP : My Favorite Long-Term Short

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 Best Buy (BBY) eventually survived Circuit City and Barnes & Noble (BKS) survived Borders.

When Borders filed for Chapter 11 bankruptcy protection in February, I started thinking about the dynamic: two or three competitors, with tight (or tightening) margins, struggling for survival in a crummy economy.  Essentially, I’m looking for specific weakness and betting against whoever I think will most likely die.  

The retail office product space looks to fit well into this model.  Staples (SPLS), Office Depot (ODP) and OfficeMax (OMX) all took a severe beating in the 2008 drop. 

SPLS 
 
OMX 
ODP0 

They survived, but performance was poor compared to the S&P. 

SP500_1 

Since I have a Staples and an Office Depot in town, I actually investigated both stores.  Been to Staples a bunch of times for the usual stuff, but I was more interested in the competition.  I have one word for Office Depot: grim.  Product selection appeared significantly more limited and some of what was there was actually dusty; all with the help from a staff energized like they’re expecting either a reduction-in-force or a physical beating at any minute; so I went short ODP in March. 

If I was inclined to put on a pairs trade, it would be long Staples and short Office Depot.  Good thing I was waiting for earnings to come out before going long Staples- as of yesterday, they reported much lower-than-expected quarterly earnings and slashed its full-year forecast, sending shares in the world's largest office supplies retailer down the most in a day in 11 years and renewing talk of consolidation (Staples shares fall after profit outlook cut).  As expected, Staples got hit for -15%, OfficeMax for -7.7% and Office Depot for -5.45%.  I feel a little better putting the 2nd half of the pairs trade on sometime over the next few weeks- at a much lower price.

Today, Oppenheimer cut its rating on Staples and OfficeMax to "perform" from "outperform," saying sales trends for office supplies retailers appear unlikely to rebound any time soon.  (Note: I think Office Depot wasn’t mentioned as they are already rated “perform” on 10/25/2010).

Technically speaking, ODP remains weak:

ODP1 

ODP2 

Over the long haul, chances are Staples will be a (the?) survivor and I see Office Depot as the weakest of the three with the greatest fundamental challenges.

Welcome Back, Fubsy_Cooter!

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I saw this comment from a long absent sloper this morning & thought it deserved a wider audience:

I haven't posted in SOH since 2009, but I sense a sea change in the market trands and when its time to short, this is the best site bar none, so I'm back. 

Here's my take regarding the Whipsaw, and a low risk way to get positioned near the beginning of a trend that will likely last close to a year.

Its becoming more apparent that, there is an imminent and significant trend change underway. The reversal of this trend will change the direction of virtually every asset class, and will provide a multi-month opportunity for profit by entering near the pivot. Over the past two years, a majority of asset classes have been influenced by a weakening US dollar.

Currently, the dollar is trying to put in a bottom. Sentiment has reached negative extremes that mark multi-year bottoms, and the commodity complex and stocks are showing signs of topping with sentiment having become extremely positive and price volatility increasing. When the dollar puts in a bottom, the unwinding of the weak dollar trade will take several months, lasting until sentiment reaches the opposite extreme of overwhelming favoritism toward the dollar, which will likely be the point at which the dollar begins to once again roll over.

With this trend reversal, assets that have risen for the past two years will fall..

-Commodities (oil, precious metals, and agriculture)
-Stock sectors (energy, real estate, financials, tech, retail)
-The Euro

Here is a low risk tactic for getting in on this trend early. The dollar has recently bounced at 72.69. That currently marks a potential bottom. When the dollar has its next correction, if it manages to stay above the 72.69 pivot, and reverses upward through its peak prior to correcting, positions should be bought that favor a strong dollar.

Short commodities (oil, precious metals, and agriculture), stocks sectors (energy, real estate, financials, tech, retail) and the Euro.

To manage risk, position size should be determined by setting a stop 1% below the 72.69 level on the dollar (71.97), and calculating how large a position can be taken such that one’s loss if the trade goes against them is within one’s risk tolerance.

For example: With a total hypothetical account size of 100k, I might be willing to risk 2% of my account to open this trade. Thus, if I buy DUG at 32.00 (appx where it will be if the dollar breaks through its peak pivot), and set a stop at 25.00, (appx where DUG would be with the dollar at 71.95), I could open an initial position of 300 shares. 300 x 7.00 would give me a loss of 2100 or 2.1 percent of my account if the stop is hit. If the strong dollar trend continues, positions will be added when the dollar has corrections, and when it reverses higher after becoming oversold. New stops will be set below bottoming points. The reward to risk ratio is highly favorable if one waits for this setup.

An even more compelling oppty awaits when Silver and Gold reach their bottoming points, which is why I'm only willing to risk a small percentage of my portfolio. I want to preserve capital for that time, but I believe getting into a strong dollar trend offer the potential for substantial gains in the meantime.