High Yield Bonds – Sounding a Warning?

 

Tom McClellan (https://www.mcoscillator.com/) provides a free weekly report called Chart in Focus. I like Tom’s work because he comes up with novel ways to view the market.

This week he refreshed the High Yield Bond Advance-Decline Line.

Figure 1 shows the chart in his email. You’ll see that we are seeing a divergence between the S&P and the Bonds A-D Line.  That doesn’t mean we can expect to see an immediate decline in US stocks.

In 2007, the S&P peaked in October but the Bonds A-D line peaked in May (Figure 2). As a rule, the Bonds A-D line precedes a peak in the A-D line. For example, in 2007, the NYSE A-D line peaked a month ahead of the Bonds  A-D line (the NYSE peaked in May 2007).

Tom McClellan believes that we’ll see a stock market top in March 2018. The date is certainly in line with Harry Dent’s ideas that we’ll see a top in 2018 – 2019, and sooner rather than later in the period.  So, we’ll see.

I’ll be relying on the Fred AMB and the NYSE A-D line to provide early warning signals of a significant top. In the meantime, how about short-term highs?

That’s a little more complicated because:

  1. The 18-day swing is an R3 uptrend – where stats play less of a role. For the record, the latest 18-day impulse swing has over an over 95% probability of a correction: exceeded mean +2 in both time and price.
  2. The 5-day swing shifted to an R3 move on Jan 12. Usually, R3 swings end within mean impulse. The 5-d’s mean is 16 trading days. So, we could see a short-term high around the end of the week (probably 1-day swing magnitude. Remember for my charts, a 1-day swing is the same as a 290-min, 5-period swing).
  3. The Ray Wave has a price target for a minor top around 2820.1 to 2828.8.
  4. At that level, price-wise, the 5-day would have an over 70% probability of correcting (greater than mean +1 stdev).
  5. Figure 3 shows all the various strands. Putting all of them together, once the 2820.1 to 2828.8 level is seen, we could see a 290-min, 5-period swing correction.
  6. If we do see the expected 290-min, 5-p correction, we should see a correction of 7.40 points (stdev 3.32).
  7. Can we see a larger one? Sure, given how stretched is the 18-day. But, let’s worry about that once we see the what sort of selling pressure appears at a 290-min, 5-period swing high.

SUMMARY

We could see this week, around a 7-10 point correction, once prices reach the 2820.1 to 2828.8 zone.  (All figures basis cash).

As always, you need to make your own trading decision. I am expressing my views and they should not be taken as trading recommendations.

FIGURE 1 High Yield Bonds and S&P 2017
FIGURE 2 High Yield Bonds and S&P 2007

FIGURE 2 High Yield Bonds and S&P 2007

FIGURE 3 S&P 18-day and 5-day swings

 

Superman Stopping a Runaway Train?

Is FEAR keeping you away from trading the stock indices? Perhaps you feel that trading the indices will be like Superman stopping a runaway train?

Perhaps and perhaps not. Continuing from yesterday..……

We’ll use the GFA’s angle of ascent to identify the current S&P momentum.

The 13-week shows that since August 25, 2017, the quarterly trend in the S&P has started to accelerate. And, since Trump’s election, the rate of acceleration has increased to an R3. If the price structure aligns with the momentum grading, we’ll see corrections only in the second lower time frames, i.e. in 5-day swings.

13-week Swing S&P Cash

The 18-day and 5-day swing chart show the momentum acceleration increased on December 29, 2017: from an R2 to an R3. For R3s corrections will be seen only in the intra-day charts, the 290-min or 60-min.

18-day and 5-day Swing Cash S&P

The next chart is the 60-min CFD. I’m showing this timeframe because it’s easier to see the patterns and zones. I am expecting a 290-min 5-period swing correction.

The first chart shows the stats for the 290-min. The current 5-period swing has moved 91.80. A normal swing is around 36 point, and the swing has a standard deviation of about 20.60 points. Statistical theory suggests there is an over 95% probability that the 290-min swing will correct. Because of the probability rating, I am unwilling to add to my S&P positions until the correction occurs.

The next question is: what is the price structure telling us?

We are seeing a decrease in momentum – what I want to see if looking for a corrective move. Notice that the S&P 60-min is now below the 4×1, and last night, was unable to close above it. A bearish-conviction close below the 2×1 will suggest a normal corrective 290-min move is underway. A normal correction in the 290-min is 20.60 with a standard deviation of 8.80. This gives us a range for the correction of 16.4 to 29.60, (2741.2 to 2728.0 basis the S&P CFDs)

60-Min GFA S&P CFD

Finally, two services:

suggest that we’ll see a top around January 10 and a low around January 22.

Seasonal Chart (through courtesy of SignalTradingGroup)

A correction of more than 50 points will sound an amber warning that the momentum has shifted and we may be on the way to seeing a larger correction. In that case, I’ll review my current strategy of buying the dips.

Why 50 points? Fifty points is greater than the 290-min, 5-period swing corrective mean + 3 stdev!

So to summarise:

  • I manage my stock indices by relying on three indicators, Libor Rate, AMB, and Advance-Decline Line, to warn me of a top.
  • I also rely on time and the price structures to provide warnings.
  • So far, no amber signs have been thrown up. Until these appear, I’ll continue to buy dips.
  • I’ll use trade size to manage the risk. I’ll also use my trade management rules to protect my capital, e.g. I’ll add to my existing longs only when the risk to the existing positions is as close to ‘0’ as I can get it. Trailing stops assume a large slippage on fills.

So, what do you think?  Would you trade the indices? Leave a comment and let me know.

Trade the S&P?

Yesterday, Lee Shui Sing  asked:

” Do you mind to share during this period
• how would you prepare yourself for the warning you mentioned about?
• How do you manage your trading account?
• Stay away from stock market?
• Only play shorterm?
• What about forex market?”

I have interpreted the questions to mean:

  1. Given the risk in trading the stock indices, how do I manage the risk?
  2. Why am I not trading the forex market?

To answer question 1, I need to refer back to my trading philosophy, one I borrowed from Trader Vic. In order of importance:

  1. Protection of capital
  2. Consistent execution
  3. Superior returns

My context to the stock indices is based on Austrian economics, cycles and price structure. A short summary:

  • QE by all the major Central Banks has created an asset bubble which must burst – it’s not a question of if, but a question of when.
  • The cycles I rely on suggest there is at least a tradeable (if not a major top) occurring sometime in 2018-2019. The shorter cycles will narrow the period.
  • The price structure suggests we’ll see a blow-off wave before the top occurs.

How do I manage the risk?

The normal way: by position sizing and relying on my trading rules. I don’t usually reduce my trader’s timeframe (the monthly swing, 18day).

Let’s look at the current structure. You need to know that one of my tools for measuring momentum is the Gann Fan. See Understanding Gann Angles.  The price structure and the GFAs need to align.  When they don’t the price structure takes precedence. You’ll see what I mean when we consider the current S&P position.

I have four grades of momentum:

  • R0 – retracements greater than normal
  • R1 – normal retracements
  • R2 and R3 – retracements seen only the lower timeframes……

More tomorrow

A Warning for the Stock Market?

I’m near-term bullish on US stock indices. But, I am also wary of signals that warn of reversal. Last week, I mentioned two indicators I keep a close eye on, the FRED Asset Monetary Base and the Adance-Decline line.

Today, I’ll introduce the third of the Musketeers, the Libor rate in US Dollars.

I use the Libor rate as a forecasting tool. As long as they are more or less in line with the Fed Fund Rate, in this context, I expect to see more upside in US stocks. But, a rising Libor rate spells danger. And, that is what we are now seeing.

Figure 1 show the November Fed Fund Rate at 1.16. Figure 2 shows the various term Libor rates all at multi-year highs and all above the Fed Fund Rate. True, not at divergent levels that call for an immediate exit of long positions; but, the divergence in momentum does call for caution.

Fed Fund Rate
Libor Rate

S&P: A Parabolic Rise or Catastrophic Dive?

Is the S&P going to tank? Are we going to see  2018 as the year when…..

It almost has to be the year that this over-extended, over-stimulated bubble finally bursts – and when it does it’ll shed 40% to 50% in the first three months of the crash“. (Harry Dent)

Or are we going to see the parabolic rise predicted by some, Phil Anderson, who sees the bull not ending until 2025 – 2026.

As a trader, I find the long-term forecasts interesting and important as a context. But, I prefer to reply on Wyckoff and Steidlmayer to give me a clue on how to trade.

Right now, the longer-term indicators I rely on are not showing weakness.

Figure 1 shows the St. Louis Adjusted Monetary Base. A downturn in this chart will give us about a 6-month’s heads-up that money will flood Main Street. As a result, we’ll see an upsurge in inflation. The question is whether the FED will raise rates sufficiently quickly to stop hyperinflation. But, if it does that, we’ll see rates rise dramatically enough to cause a stock market bear to raise its head.

The second chart, Figure 2, is the Advance-Decline line. I’m looking for divergence before I’d be comfortable thinking a top may be in. No sign of one so far.

In the meantime, I’ll look to my charts to get me long.

Dec 29 had important price action clues for me. Instead of producing the reliable Xmas rally, we had a strong down day. I decided that the 29th would raise amber flags (i.e. a warning of weakness) unless we see a strong up day today. One sign of that would be a gap open that remains open by day’s end.

With that idea in mind, my strategy for today was a simple one:

  1. If there was a gap open in Globex, I’d buy the open.
  2. Stops below Friday’s low.
  3. I’d exit the position on a 15-min close below 45% of the open-gap.
  4. I’d re-assess at 9:30 EST. The open-gap is a more reliable pattern based on day session parameters.

An aside: Thanks to all who dropped me a line. I appreciate the comments.

FIGURE 1 St. Louis Adjusted Monetary Base

 

FIGURE 2 Advance-Decline Line

 

FIGURE 3 15-min S&P CFD

 

GBPCAD 8:50 07-15 Update

BarroMetrics Views:  GBPCAD 8:50 07-15 Update

Final blog in the series of updates.

The bottom line: if short, I’d be looking to exit Monday morning. The ideal scenario for an exit:  an early morning pullback to the Primary Buy Zone of Figure 1 (bottom of LRB -exit shorts).

Then a move to new highs that provides momentum divergence in the LRBs – this provides a setup for new shorts.

Figure 1 shows the 60-min Linear Regression Band. It suggests we’ll probably see new highs after a pullback. This scenario will be proven wrong:

  1. if we see new momentum highs without a retracement or
  2. if the pair accepts below 1.6435 without making new highs.

If we do see new highs, what is the next resistance zone?

  1. Figure 2 has a Primary Sell Zone at 1.6670 to 1.6654
  2. Figure 3 has an FTP zone 1.6565 to 1.6690

So, at this stage, I’ll be looking for a sell zone around 1.6654 to 1.6690. As the Monday price action develops, the 15-min will provide an extension zone. I’ll be looking for the 15-min to provide confluence to confirm the 16654 to 1.6690 zone.

Unless the price movement fits one of the LRB exceptions, when prices enter 1.6654 to 1.6690, I’ll be looking for momentum divergence and then a sell trigger. The initial stops will be above 1.6690.

The above completes the analysis update for the July 12 presentation.

I received a query that fits this context. If I am looking to sell again, why don’t I just hold onto current shorts?

Because: the reason for the current shorts is gone. The price action is suggesting higher prices. I’d rather cut and then see if I a sell-setup takes place at higher levels or (if no new highs occur) upon a breakdown.

FIGURE 1 60-min GPBCAD

FIGURE 2 60-min GBPCAD

FIGURE 3 290-min GBPCAD

 

 

 

GBPCAD 20:10 07-14 Update

BarroMetrics Views: GBPCAD 20:10 07-14 Update

It looks like we’ll see, tonight, the 1.6530 to 1.6565 zone.

Figure 1 shows the 15-min chart with the sideways zones. Usually, a bearish conviction bar below 1.6509 will suggest the high is in.

However, Figure 2 (the 15-minute with Linear Regression Bands) suggests we’ll see new highs before the end of this minor up move.  For this reason, I am expecting to see a pullback to the Primary Buy Zone of the LRB (bottom zone marked by the red and black lines); followed by a new high into the 1.6530 to 1.6565.

Acceptance below 1.6464 will negate the new high scenario for today.

I’d prefer not to sell unless I see a setup in the 1.6530 to 1.6565 area.

I’ll do another update tomorrow morning.

FIGURE 1 Zones Sideways

FIGURE 2 LRB

A Goodbye

BarroMetrics Views: A Goodbye

Has it been ten years?  Almost, I first started publishing this blog on November 1, 2007. I’ll stop publishing on Tuesday, July 19, 2017.

That said, the blog articles will be available until December 10, 2017. This will give you time to download any articles you may want to keep.

Thank you all for stopping by. I have made some good friends here, Baz, Chris, Jason, Thomas and too many others to mention. All the best with your trading, every success.

Turning to today’s entry: I’ll finish the commentary on the GBPCAD trade. At the July 12 presentation, I started the analysis, but we couldn’t see the beginning of the trade because the BoC’s figures came out at 22:00 Singapore just as the presentation concluded.

Those of you who attended will know I was looking for the BoC not to raise rates. I mapped out a strategy for the expected ensuing rallying. I also mapped a strategy if it did. In the latter case, I concluded that:

  • given where the pair was trading ahead of the number; and
  • given that I expected the daily range to be between 190 – 300 pips, I was not prepared to sell the pair on the news.
  • Instead, I said I’d wait for the rally.

The BoC did raise rates. The GBPCAD then fell; we saw 315 pip range for the day. So, yesterday I was looking for a rally.

Figure 1 shows provide two important bits of information:

  1. Acceptance above the blue 120% (1.6789, I’ll round that to 1.6790) tells me that the current structure, the 5-day swing downtrend, is probably over; breach of the 5-d swing high at 1.6975 will confirm).
  2. The red lines show the 5-day resistance levels.

Figure 2 shows the 60-minute chart with resistance levels. Yesterday, the GBPCAD moved into the bottom of my preferred zone, and I took the trade at 1.6473. My initial stop (hard) is above 1.6616; my soft stop is above 1.6577.

Yesterday, the GBPCAD moved into the bottom of my preferred zone, and I took shorts at 1.6473. My initial hard stop is above 1.6616; my soft stop is above 1.6577.

(By ‘hard’ I mean ‘the stop order is resting in the market’; by ‘soft’, I mean I’ll be looking to exit should I see acceptance above 1.6577)

I believe there is a 50-50 chance will see a test of 1.6530 to 1.6565 today to establish a congestion high on the 60-min. The congestion low is at 1.6354.

I’ll publish an update at 20:00 tonight Singapore time.

FIGURE 1 GBPCAD Daily

FIGURE GBPCAD 60-min

S&P Confirms the NASDAQ Signal?

 

BarroMetrics Views: S&P Confirms the NASDAQ Signal?

A 10% correction in the wind?

Before I begin – if you are planning to take part in Singapore, a caution: we have only 18 seats left. I expect these gone today. Do register early or you may miss out. If you do miss out, register for the live-streaming. (I prefer being present, but it would be better than missing out!)

Turning to today……..

An important event occurred: the S&P took the first step, of a two-step confirmation, to confirm June 29’s NASDAQ sell signal.

Let’s turn to Figure 1, NASDAQ, showing the 13-week swing (black line, quarterly trend). It shows that line will turn down at 5295. It also shows the S&P 13-week swing; its line turns down at 2315 (both basis cash)

Figure 2 shows the 18-day swing and 5-day swing (blue line, weekly trend). The 18-d shows no change in trend, whereas the 05-day shows the breach of the uptrend. There is a Normal Change in Trend pattern. But, the filters, momentum, time and price have yet to be triggered. Consequently, we may still see a rebound in the 5-day generate buy signal.

Figure 3 shows that the 18-day correction will nudge into 13-week corrective territory at 2366 Penetration of 2323 will confirm that we are seeing a 13-weeek correction. A move into the the ’80-120′, 13-week correction band (grey lines) is important. Why?

Because a 13-week correction suggests an 18-day impulse move. Of course, an  18-day impulse move encompasses a 05-day swing trend down.

By combining the two, the stats suggest a minimum 10% correction, giving us a price target of around 5300 to 5310.

In the two-step confirmation, the second step will be a tandem, bearish conviction-close (of at least normal range and volume).

Will we see that tonight? We may, we have NFP at 8:30 EST. Expectations are for a figure of 170K with the unemployment rate coming at 4.3. The consensus ranges:

  • NFP 140k to 200k
  • Rate 4.2% to 4.4%

Let’s see what happens.

FIGURE 1 13-week NASDAQ & S&P

 

FIGURE 2 05-day and 18-day NASDAQ & S&P

FIGURE 3 18-d ’80-120′ Band

NASDAQ – Sell Signal?

BarroMetrics Views: NASDAQ – Sell Signal?

A friend of mine, Tom Wong (fund manager in NY), dropped me a line to say I was focusing on the wrong index. I ought to be looking at the NASDAQ: this index that will lead the decline because it’s been the one leading the rise.

He’s right.

Figure 1 shows a comparison since the last quarterly swing low. The NASDAQ has risen 26.77% while the S&P only 17.76%.

Figure 2 shows the current NASDAQ; Figure 3, the current S&P.

[The red lines represent the 18-day swing (monthly trend), the black ones, the equivalent of the 13-week swing (quarterly)].

Neither chart has generated a change in trend pattern. So, at this stage,  if we see a decline, I’m taking the view that we’ll be seeing a correction either in the 13-week or 18-day swings. Because of the Ray Wave count, I lean towards a 13-week correction.

If that proves true, what percentage correction are we likely to see?

Figure 4 shows the NASDAQ calculations. The sample size is too small to be reliable. Working with what we have, I’d say 13% to 19% (S&P around 10% – the sample size there is reliable).

What would I need to see to say that a correction is on the way? A bearish conviction-close in the S&P below the June 29 low (2405) by Monday, July 10. By ‘bearish conviction-close’, I mean:

  • an open no lower than in the top third of the day’s range.
  • a close no higher than in the bottom quarter of the day’s range.
  • with a true range of not less than 60.

The S&P bearish conviction-close would confirm the NASDAQ heads up generated on June 30, 2017.

I’ll look to trade the 18-d correction following the first 13-week leg down. The strategy means I’m sidelined for the 18-day, first leg down.

Image credits: safehaven, optuma

FIGURE 1 NASDAQ & S&P

FIGURE 2 NASDAQ

FIGURE 3 S&P

FIGURE 4 NASDAQ Stats