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.

Lost Opportunity Cost (by David Kern)

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I received an interesting piece of mail this week.  If you invest/trade the markets long enough, you’ll get these sort of mailings fairly regularly.

It was an invitation to participate in a class action lawsuit over something Apple did between 2001 and 2005.  I don’t really know or care what they were sued over, but Apple settled – and the cash is now available to be claimed.  Essentially, if you bought shares of Apple during that time you might be entitled to some portion of a settlement.  I did a search of my trading records, and sure enough – there it was.  I’d bought AAPL on 11 Oct 2005 and sold on 18 Oct 2005: a quick 4% gain.  However, as I reviewed more of the legal mumbo-jumbo, it became clear that my take on the lawsuit settlement would amount to $0.07 (estimated) per share.  Bottom line – not worth my time to even fill out the class action paperwork.  The 4% I made on the trade four years ago far exceeded any reimbursement that I would receive from this settlement.

The interesting thing was realizing that the price I paid for AAPL at that time was $50.59 per share.  Wow, wouldn’t it be nice to have kept those shares?  My unrealized gain today would be 646%!  That’s not really” go-crazy-retire-to-Fiji money”, but it’s well over 100% gain annualized…  Why did I sell at that time?  Probably a stop, could have been an itchy trigger finger with a desire to book gains – really I don’t remember.  When I look at the chart from 2005, it’s really a facepalm moment.

This has been an introspective moment over the weekend, as it’s caused me to question some of my approach to trading the markets.  I assess that I do above average at picking what to buy, and I’m usually pretty good on when to buy also – but my timing on when to sell has had some sucktastic moments.  I’ve experimented with putting trailing stops on everything – only to be whipsawed out of stocks that continued up-up-and-away.  I’ve bought uptrending stocks that then paused and/or retraced just after I buy  – so I sold (locking in a loss) only to find them explode upward the next week.  I’m starting to think that I need to slow down my timeline a little; step back from every wiggle of the chart and let my trading positions work for me.

I’ve believed for a long time that “buy and hold” is a steaming load of crap.  There are a plethora of market indicators that clearly show market trend, and it’s foolish to go long in a bear market or short in a bull market.  My favorite indicators for trend are the market breadth and bullish percents (which as of this writing still show a bull market).  These work well and consistently.  My issue seems to be finding my rhythm for when to take profits or cut losses, and I’m open to ideas on how to improve my game.  I don’t care to hear the Warren Buffet answer (who has said his time horizon is to never sell), but I feel there’s gotta be a better system for when to sell.

By the way – going back to the question of buy and hold AAPL from Oct 2005 – I don’t think that would have been a good idea at all.  There were a couple of clearly defined downtrends the first half of 2006 and most of 2008.  I think any reasonable trader wouldn’t sit on his hands through that bleeding.  Certainly I couldn’t have, considering the market breadth and bullish percents clearly showed defensive situations during that timeframe.  What do you think?

Major Commodities Top? (by Springheel Jack)

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I've been mentioning for a while that we're in an area where we could see a very major commodities top, and I'm aware that my view is at best a minority view, but I'd like to put the case anyway, and to stress that I'm seeing this from the perspective of an chartist who mainly calls reversals on the basis of trendlines, and to show how impressive some of the trendlines are that commodities have recently reached and, so far, reversed at. I can only show a few of the commodities here so I've chosen copper, silver, oil as three of the most influential individual commodities and CRB to represent the commodities complex as a whole.

First the CRB, where the index has reached the lower trendline of the rising wedge that broke down in February 2010. It has also hit the upper trendline of the more recent rising wedge and is showing strong negative divergence on the daily RSI. At this level I would expect to see at least a retracement to the lower trendline of the rising wedge, and if that should break, considerably more. It's also worth noting that in 2010, CRB peaked almost four months ahead of equities:

The next three charts are much longer term charts. The first is the copper chart, where a major long term rising trendline has been reached. The trendline could be hit again short term, but unless we are to see a massive resistance break then that trendline represents the likely high for this move up, and I'd expect to see a move at least to the lower trendline of the shorter term rising channel soon:

The resistance level reached on silver is even more impressive, and the shorter term charts are indicating a retracement back to the 25 level here, and if that level turns out to be an H&S neckline, which it might, then perhaps much further after a bounce there:

The trendline hit is less definitive on oil, but it has hit two significant looking trendlines in recent days, and we may well see a reversal on oil too. It might break up through back into bubble territory of course, but the low stocks and tight production capacity over demand that fed the 2007/8 spike simply isn't there any more, and on that basis, this is a natural reversal level for a substantial retracement:

Commodities are also a currency story as well of course, and on the commodity currencies we saw a major trendline support break on AUDUSD this week. At that break it has formed a very characteristic reversal H&S with negative divergence on RSI, and I'm looking for a retracement to test the important support level at 94 if this continues to play out. It would make sense if that took place within a sharp correction on commodities generally, as the prospects for USD aren't looking promising generally at the moment, in which case any such decline would be likely to be commodity related:

Quantitative easing has fed this boom in commodities, and commodities peaked months before the end of QE1 in late March 2010. QE2 isn't finishing until June 2010, but it may well be that commodities are peaking further before this time. On the longer term charts the real question is whether there will be a QE3, and that is open to doubt.

The Republicans won't be keen, and there would most likely in any case be a gap of several months between the end of QE2 and the announcement of QE3 during which, if 2010 is any guide, we would expect to see equities and commodities tank while bonds soar. If commodities have peaked now, that means that we could well see a ten or twelve month period now where commodities retrace some of their gains in the last two years. In the event that there is no QE3, it might last considerably longer.

Opex Week Begins (by Springheel Jack)

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It was a very bullish week last week and my IHS and Rectangle targets for ES were almost met by the close on Friday. Since then they have both now been met and ES is now within four points of hitting the upper trendline of the rising wedge on the ES daily chart. That's at 1296.5 today:

Will ES reverse strongly there? Possibly, though I'm seeing little to suggest a reversal early this week. If we are making an interim top here, then I'd expect to hang around for a few days making it, especially in opex week. There's also the complication that USD appears increasingly to have made a major interim top and it's hard to say where the short-term move up on EURUSD might finish. EURUSD is still up against the major resistance level that was reached last week, but is looking worryingly bullish, and that resistance may be broken shortly while EURUSD makes another powerful move up. The big IHS target is 1.3975:

I was looking to the possible IHS on GBPUSD to mark a short term high on USD currency pairs generally, but the neckline failed to hold, and GBPUSD has made a significant move towards the next major resistance trendline at 1.613. I think GBPUSD has bottomed and am expecting to see a new high above 1.63 in the next few weeks:

The large possible IHS on copper that I though might form last week has formed, but the neckline looks a bit too easily crossed to me and I'm not sure how seriously to take it. A short term rising channel has formed which looks more promising:

One of the indicators I look at most for indicating medium term direction is the gold/silver ratio. In practical terms that is mainly about silver, as silver has been acting as a sort of leveraged gold for years now, outperforming on both the upside and downside. The question is really then whether silver is showing serious signs of having topped, and that looks very possible. Silver has reversed at major multi-year rising resistance, has broken the support trendline up from $18, and may well now be in the late stages of forming an H&S pattern. The pattern is a bit messy though and in my view really needs silver to make a right shoulder that could, short-term, take silver back up over $30. Silver therefore looks promising, but doesn't suggest much short-term downside:

Now that USD appears to have topped I'm more doubtful about seeing a sharp correction on equities in the near future. I think we are in the process of making some kind of interim top though. On the bigger picture I'm not expecting to see the top for 2011 until we reach the 1380 area on SPX. The move up since March 2009 has been a decent fibonacci move so far on SPX, with the April 2010 high near the 61.8% retracement of the bear market, and the July 2010 low near the 38.2% retracement. The next obvious target therefore is the 78.6% retracement level, and that is in the 1380 SPX area. I'm expecting to see a decent sized correction before we see that target reached however. If the 1380 SPX level is reached it will be a serious candidate for the final high for the current cyclical bull market:

As you can see from the main rising channel marked on this chart, there is a channel target somewhat higher than 1380 SPX as well, and if 1380 breaks with confidence, that would be the next major upside target.

The Long View

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It's been a while since I've stepped back and taken a look at the big picture of the markets, so I'll take this opportunity to do so. This will be my last post of the day, so I imagine there will be a gazillion comments by the time Springheel's post is up in the morning.

The market has been climbing mercilessly for twenty-two months now, and the surviving bears are, naturally, pretty despondent over the Fed's seemingly unlimited ability to levitate these markets. If you look at the very long-term charts, however, the rise makes sense in context, and there is hope for the bears after all.

The NASDAQ Composite is right near its 38.2% retracement level, which proved to be an important reversal point back during the 2007 top (in spite of a bit of an overshoot). In each of these examples, I've circled the interesting price points of the charts in red.

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Looking at the Dow Industrials (which, believe it or don't, I'm still looking to hit under 6,000 before this is all over – – see the pink tinted circle) the retracements also seem to have plenty of power. We have well exceeded the level found last April, but as March 2009 proved, you can have some "overshoots" while, by and large, respecting these support and resistance levels. Take note of the many instances of this happening.

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Here's an even longer-term view of the same index.

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It's not often that Fibonacci Arcs are useful to me, but there are a few indexes in which they are. The S&P MidCap 400 is one of them. On the left side, you can see the fascinating behavior of the prices are they hug the curve. After the cruel rise of the past two years, this index is at last approaching the same arc.

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Probably the most fascinating chart to me of all is the S&P 500, on which I have placed fan lines going back about eighty years. The power of these lines is breathtaking. I've highlighted the 61.8% line in particular (start point: 6/30/1932; end point: 3/24/2000).

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Zoom in closer to get an appreciation for where we currently are.

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There is no shortage of people, pundits, and publications that have made fools of themselves calling "the" top. I don't want to join that chorus, since an overpriced market can always become even more overpriced. But, for the seven bearish individuals still alive here on Earth, I can say the charts may be a source of solace.

Longer Term Charts (by Springheel Jack)

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The rising channel on ES caught the low yesterday perfectly, and after the very strong reversal on the jobs figures before yesterday's open, we're now nearly back to the top of the channel, which I have in the 1278.5 area:

That still doesn't get ES to my main target for this move up. Pug's got a primary target of 1291 SPX for this move up, with a secondary target at 1315 if 1291 isn't held. That fits pretty well with my main target, which is at the upper trendline on the ES rising wedge since July. That is at 1284.5 ES (1288.5 SPX) if we were to hit it today, which I'm not expecting:

This current move up has dragged on longer than I expected. When I first posted the rising wedge above in early December the target was in the 1250 area. Nonetheless what I'm expecting to happen after the target is hit remains the same, with a large correction accompanied by a strong move up in USD. USD has been drifting sideways as SPX has inched upwards, but every time I'm been wondering whether the USD rally is over it has bounced back up again. I'm seeing what appears to be a bull flag forming on USD, and that should get USD to the next key resistance level at 83.6. I've done a longer term USD chart to show the two likely targets for this move. I'm leaning towards the lower (triangle) target but if an IHS forms with the neckline at 83.6 I'll be looking at the higher (channel) target in the 93.5 to 95 area:

I'd like to see silver correct while equities correct, as that will keep the important gold/silver ratio indicator on side, and that's looking very promising on the big picture daily chart, where silver has made a nice reversal at resistance and has (briefly) penetrated the support trendline for the move up from 18. I'm not expecting a move to the main support trendline marked on the chart, but I think a retracement to the 22 area looks very possible:

As an aside I was looking at PCLN yesterday and thought I'd post the longer term chart for PCLN. The chart is weekly and I've done it on log scale, as it handles the huge swings in a more visually friendly format. This is a simply astonishing chart, with PCLN losing over 99% of its value from $990 after the tech bubble imploded, making a double bottom just over $6 in 2001-3, and then recovering to $144.34 in early 2008 before the property bubble imploded. After dropping back to $45.15 in November 2008 it has since risen almost 1000% to close yesterday at $433.60, which is slightly over three times the level of the 2008 high. Simply amazing and I'm wondering whether this could actually make a new high before the current government debt based speculative bubble implodes as well. Only in the long bubble era of Greenspan and Bernanke could anyone see a chart like this one: