A Nervous S&P Trader

BarroMetrics Views:  A Nervous S&P Trader

Long and uncomfortable – two words that best describe me at the moment.

Why? The three attached charts tell the story.

Figure 1 is a weekly chart with 13-week swings (quarterly trend). Notice that the weekly ranges before the Trump breakout increased the average true range and volume. This led me to the conclusion that what we were seeing was a distribution pattern.

The Trump victory on 11/11/2016 saw an upside breakout. At the time, the question raised was whether we were seeing an unexpected (in which case a new uptrend had started) or a surprise event (in which case we’d see a rejection of the new highs and the start of bear).

The price action following 11/11/2016 (Figure 2) persuaded me that we had seen an unexpected event and that a new uptrend was in place. More, given that Trump’s policies were unlikely to deliver on his grandiose promises, the current uptrend could be classified as a bubble in the making.

What was it about the price action that led to this conclusion?

Well, two things:

  1. The shallowness of any sell-off, and
  2. The directional persistence following each pause. (Figure 2).

The reasons why I am ‘a nervous’ long is also shown in Figures 1 & 2. Notice that the Trump breakout is unaccompanied by a healthy increase in volume and range.

Figure 1 shows that we have seen this pattern before, the QE effect, especially the period 2012-11-16 to 2014-09-19. That was a two-year uptrend when the S&P ground up on below normal range and volume, increasing some 50.69% in the process.

My plan is to reduce position size and tighten my stops to manage my long trade. The last thing I want to be is lackadaisical and have Black Monday (1987-10-19) surprise me.

FIGURE 1 S&P Weekly

Figure 2 S&P Daily

Trade The Price Structure

BarroMetrics Views: Trade The Price Structure

A friend of mine trades the markets on fundamental and is a very profitable trader.

Whenever we get together, the conversation invariably leads to the discussion: “all things being equal, which is the better approach”? Of course, the key words are: “all things being equal…”. Clearly, the best approach would be the one that best suits the trader’s personality.  But, putting that question aside?

The short answer is I don’t know.  What I do know is I’d probably be out or losing my shirt if I were using fundamentals.

There were three pieces of news out yesterday:

  • Positive for the stock market at least in the short-term, repeal of Dodd-Frank.
  • Negative:
  1. The report that the Trump team had been in contact with Russia during the elections. Bearing in mind that Russia did attempt to influence the elections in Trump’s favour, this has the potential of becoming a very serious problem for Trump.
  2. The fact that Chinese courts are now beginning to support Trump’s trademarks. This is important because Chinese courts are recognised as being an arm of Chinese policy (i.e. they are not independent). If that is the case, then it could be said that Trump is receiving a benefit from a foreign government – something expressly prohibited by the Consitution.

A case has been brought by some ethics experts and legal scholars, but it is thought the case will not succeed. (See The new lawsuit accusing Donald Trump of violating the Constitution, explained)

So, what did the stock market do? Rallied strongly. If ever we were looking for evidence of a bubble, last night’s price action was it. Repeal of Dodd-Franks opens the door to the sub-prime abuses especially since the repeal includes the Volker Rule (see If Trump repeals Dodd-Frank it would be a monumental mistake).

So for the moment, for US stocks, I’ll be adopting the strategy outlined in yesterday’s blog.

A Rally on a Whiff of a Prayer

BarroMetrics Views: A Rally on a Whiff of a Prayer

I’m long the S&P, but I have cut my position size to half and made sure my stops are in. The current uptrend in all timeframes (from 12-month to 1-day [yearly to daily]) leaves me very nervous.

Why?

First the technical picture. Figure 1 shows the quarterly trend from the sub-prime low in June 2009.  In that period, we saw two 13-week corrections – the price action marked by the green and red rectangles. I have also marked the Trump election win with a red time-price label (11/11/2016).

Figure 2 is a Daily chart starting from just before the Trump win to yesterday. What we see is the congestion period has a larger average range and average volume than the current trending period! Historically the current period has a range and volume that is less than normal. In the past, healthy impulse swings have had higher average ranges and volumes than congestion stages.

So that’s one reason why I am nervous. There’s another.

It seems to me that this rally is fuelled by a belief in the Trump miracle of making Amercian great again: he’s going to create new jobs, cut taxes, attain greater growth and balance the budget.

The problem is the way he is going about it – it looks to me that we’ll have the illusion rather than the reality. Take the current proposed Republican tax bill.

The Financial Times had an excellent piece in today’s paper: Taking Sides in the US Tax War (unfortunately I could not find a link to the piece). Essentially, the bill would cut personal and corporate tax and at the same time impose a 20% tariff on imported goods. In addition, it would end global US tax, taxing only profits and income generated in the US.

The result of the legislation is to pit the “the consumer companies against their industrial peers. Big exporters such as Dow Chemicals, General Electric, Boeing, Caterpillar and Pfizer have formed the American Made coalition to champion the House plan.” In short, its big business against the ‘little guy’ – the voter that swept Trump into office will again by left out in the cold.

Also. the Tax Foundation says the plan would increase the Federal debt over ten years by 2.4 T!!

My fear is when the stock market realizes what a house of cards Trump is selling, it will fold and fold quickly. So why am I long?

Assuming we are in a bubble in the making, one thing I have learned is bubbles tend to last a lot longer than most expect.

So, I’ll reduce position size, allow for a massively poor fill on my stops and hope (on a whiff and a prayer) that I’ll accumulate enough equity in the position so that even a massive drop will not deplete my capital.

FIGURE 1 S&P Weekly

 

FIGURE 2 S&P Daily

Financial Crisis – Lessons?

BarroMetrics Views: Financial Crisis – Lessons?

A few readers have written asking why my US long-term, fundamental, view is so pessimistic. Here’s why.

My view is defined by Austrian economics, the only economics, I believe, that explains the business cycle.

In summary, the Austrian view is when a government inflates the money supply, especially when the increase rises faster than the increases in goods and services, we see malinvestment. In the 21st century, this has taken the shape of a housing bubble that was followed by a stock market rise.  At some point, the malinvestment has to correct. That correction takes the form of a severe recession or depression. The longer the money supply was inflated, the more severe the recession.

The 2016 US deficit came in at USD 19.537B (see The Feds Borrow More than the Deficit; the site also shows the deficits since 2000). What has that brought?

Well, it brought the housing bubble and the 2007 crisis. And since 2007, it has provided a stock market rally that to date is the second longest in history.

But what about the economy?

Figure 1 shows the GDP number from Shadow Stats from 1984 to 2016. You see that since 2004, the US economy has not grown in real terms (it has remained below ‘0’ line). Also, despite the money thrown at it since 2007, both the official and Shadow Stats numbers have remained in a sideways mode.

Now since Trump’s election in Nov, the S&P doubled its increase from the beginning of the year – due perhaps to an increase in bullish sentiment.

But, I see little in Trump’s to suggest he’ll turn around the economy.

Sure, there are some great ideas, reduce Government red tape, adopt policies that will boost jobs, cut tax. On the other hand, we’ll see expenditure on the Wall and other infrastructural spendings; we’ll also see increased spending on the US armed forces. Moreover, the spending will come first, and I have doubts the budget for 2017 and beyond will balance, let alone make up for the accumulated deficits.

So, we will see a stock market crash and at least a severe recession at some point. The problem for the trader, that some point can a long time coming. In the meantime, for US equities and indexes, you need to be long or out of the market.

FIGURE 1 GDP Shadow Stats

Conflict Management

BarroMetrics Views:  Conflict Management

In ‘New Era 2?‘ and ‘All Hands on Deck‘, i raised the conflict between the contextual picture and short-term outlook for US Stocks.

In the long-term, the trillion dollar deficit will come home to roost. It caused mal-investment and a widening wealth gap that led to a Trump victory.

Right now there is a disconnect between the US Economy and the Stock Market. The Stock Market is supposed to reflect the prospects of Main Street. Instead, it partially reflects FED created funds looking for a home.  (The bulk of the rest is parked at the St Louis Fed Reserve).  And, we are at a crossroads: Yellen recognises the need to let rates rise – otherwise, the FED will find it difficult to combat the next business cycle downturn

The question I posed in the earlier posts was whether Trump was an ‘unexpected event’ so that business cycle was inverted.  If so, it would mean that a rate increase would go hand-in-hand with a rising stock market.

The jury is still out on that question.

In the meantime, the short-term price action in US stocks is bullish. This week we saw a strong breakout on normal range and volume – the ideal picture.

So, on the one hand, there is a possibility of a meltdown, and on the other, a raging bull run.  So how do resolve the dilemma?

I focus on the short-term price action and trust that it will warn me when the trend has changed. What will be important is not to be sucked in by bull sentiment.

The bull run since 2008 was unaccompanied by public participation. If the public joins in,  we’ll see bubble conditions. Under those circumstances, it will be easy to lose sight of the contextual warnings. It will be important we don’t.

BREAKOUT!

BarroMetrics Views: BREAKOUT!

Home! I got back on Sunday evening, and I am walking well. Tomorrow, I’ll have 20-20 vision; for the moment, the vision is adequate.

When reviewing charts on Tuesday morning, two strong rejection tails (Jan 19 and Jan 23) stood out (Figure 1). In each case, there was an early sell-off that was rejected by day’s end. This pattern usually suggests ‘in the know buying’ when seen near the boundaries of congestion, especially when the Steidlmanyer Development Formula suggests a breakout is imminent.

Tuesday’s (Jan 24) US trading saw the start of a possible upside breakout. (Figure 2). Wednesday’s (Jan 25) trading saw the breakout. (Figure 3)

However, that does not mean I was aboard. I have not traded the S&P since 2008. Under the circumstances, my regime is to first 3-4 days of simulated trading and to acquire the stats I use.

So, what now?

I’ll look to trade the retest (if it occurs). Normally we’ll see a retest in the controlling timeframe within 6-16 days following a breakout. I trade a retest only if I see a pattern I call an FTP.  Figure 4 shows the FTP and the Zone retest, 2278 to 2275. (Note the data here is the CFD data unlike the cash data in Figures 1-3).

What if there is no retest? Then I look for a continuation trade.

Tomorrow, I review the conflict I raised in ‘All Hands on Deck’ and ‘New Era 2?”

FIGURE 1 S&P Weekly

Figure 2 S&P Daily

Figure 3 S&P Daily

Figure 4 S&P 240-Min

Inflection Point – EURUSD (3)

BarroMetrics Views: Inflection Point – EURUSD (3)

Figure 1 shows the entry for my planned short position (1.0593).

One of the key requirements I have before entry is to ask two questions:

  1. “What does the market have to do for me to remain in a trade?”
  2. “What does the market have to do for me to exit immediately?”.

The answer depends on the setup. In this case given the possible negative development setup, the answers are:

  1. I need to see a continuation of the directional move within 3-hourly bars after entry.
  2. A strong directional bar up within 3 bars after entry.

We did not see (2). But, we also did not see (1); so I’ll exited the trade at 1.0607 (yes a loss of 14 pips) (Figure 2).

Tomorrow I’ll look at the rationale behind the stratgey as well as the main barrier to implementing it.

FIGURE 1 290-min EURUSD

FIGURE 1 60-min EURUSD

 

 

Inflection Point – EURUSD (2)

BarroMetrics Views: Inflection Point – EURUSD (2)

Figure 1, the 290-mins EURUSD shows that so far the EURUSD is still in balance.

The green reactangle shows the 1-period swing sideways price action that began on Friday. I am awaiting to see acceptance below 1.0612 or acceptance above 1.6830 before taking a position.

The odds, at present, slighly favour an upside breakout. The pair had a chance to breakdown on Friday in the US session but there were no sellers below 1.605. The same can be said this morning when the pair open-gapped down and then rallied.

Let’s see what happens.

FIGURE 1, 290-min EURUSD

Inflection Point – EURUSD

BarroMetrics Views: Inflection Point – EURUSD

Firstly, a note to say I am going for eye surgery today. If all goes well, my next blog will be Monday.

Turning to the EURUSD -it’s at an inflection point.

  1. Figure 1, a 13-week swing chart (quarterly trend), shows that a bullish-conviction close above 1.0652 will trigger a buy signal.
  2. Figure 1 also shows we are currently seeing a retest of the breakout that the form of a weekly sideways pattern bounded by 1.0652 and 1.0339. Acceptance below 1.0339 will confirm the downside breakout.
  3. If the downside target is confirmed, the first target is 50% of the width of the sideways pattern, 0.9836.
  4. Figure 2 shows a 5-period, 290-min chart (1-day trend) that may have formed an Expanding Terminal. It’s not perfect. I’d prefer to see a move above the ‘ac’ line and then a bearish-conviction close below 1.0612 (290-min bar) without a bullish conviction close above 1.0683.
  5. Note that the 290-min extends the buy trigger to 1.0683 from the 1.0652 suggested by Figure 1.
  6. I would be a buyer only on a daily bullish conviction above 1.0683 that is then confirmed by a weekly bar.

FIGURE 1: 13w EURUSD

FIGURE 2: 290-min, 5-p EURUSD

Welcome to 2017 – Denouement

BarroMetrics Views: Welcome to 2017 – Denouement 

Well, I was wrong about the Non-Farm number. It came in at 156K (just above the lower end of consensus {151k to 210k}). But, then why did the USD rally?

For the second month in a row, rather than raise the Non-Farm Payroll number, the US Bureau of Labour Statistics reported a massive 4% rise in average hourly rates.

This was the second consecutive “outsized 0.4 percent rise in average hourly earnings….. The year-on-year rate is now at 2.9 percent which is a cycle high. A 3 percent rate and above is widely seen as feeding overall inflation.” (NASDAQ Economic Calendar).

So, the 4% had the same effect as an above average consensus Non-Farm number.

Let’s see if we see a continued USD rise today.

The S&P gave a clue to the answer I am seeking. We saw a strong rally. If we see another rally today, I’ll have to put aside my long-term misgivings and go with the price action.  The upmove on Friday, in the face of a Non-Farm suggesting an interest rate hike, indicates we are in the initial phase of a growth cycle rather than in a terminal phase – the Trump election was an ‘unexpected event’ rather than a ‘surprise’.