S&P – At Crossroads II

BarroMetrics Views:  S&P – At Crossroads II

A short notice: I’ll be away in Switzerland until Nov 12 so I expect my blogs and newsletter to be affected. My apologies for the intermittent publication till then.

This was written prior to the price action of Oct 31, so it will be interesting to see how the S&P behaves tonight. But, based on the response to the FED announcement that QE has ended, I’d expect to see new highs. First target  (basis cash) is 2178.26, second target is 2404.04. But, the targets are not the subject of this piece.

Instead, I’d like to point to an event that seems to have flown under the radar.

On March 15 2014, I wrote a piece called “The Nature of Events” where I re-introduced Pete Steidlmayer’s ‘surprise, expected, and unexpected’ classification of fundamental events. Last night, the FED terminated QE. Based on the comments by some FED chiefs on the poor recent data, there appeared to be an expectation that the end of QE would be delayed. Instead, it ended on schedule.

(The response to the news was an initial sell in stocks and gold, accompanied by rally in the US$. The S&P recovered enough by close of trading to expect to see a strong show tonight).

So, was the FED announcement a surprise, or unexpected event? In my book, it was the latter. Yellen has been characterised as a ‘dove’, so say a ‘super dove’. In my book, she had every excuse to keep QE going: recent mainstream news for the US economy was worse than expected numbers.  Instead, QE ended on schedule. It may be that Yellen is more of a realist that I gave her credit for; if so, we are likely to see an increase in rates sooner than expected, we’ll see. 

Right now, the belief that the FED will be the ‘S&P’s supporter of last resort’ is still in play; and, given the last night’s price action, and especially if we see a strong move up tonight, I’ll return to my strategy of being ‘long or out’.

I am still awaiting the Black Swan that will shake the belief in the FED. If my cycle work is correct, we can expect to see that event between Nov 2014 to Mar 2015. But, till that Black Swan takes place, I prefer to be ‘long or out’.

(By the way, I’ll complete the piece on “Single Most Important Reason” either Friday or next week).

Single Most Important Reasons for Success

BarroMetrics Views: Single Most Important Reasons for Success

The other day, I was reflecting on why so many fail at trading (i.e. fail to make money) and why some succeed (i.e. consistently make money). If you think about it, we have seen massive strides:

  • In learning theory (e.g. Deliberative Practice)
  • In human understanding (e.g. science of Neurology)
  • In probability theory and Chaos theory
  • In technology – that allows us to receive ‘instant info’ in terms of charts and quotes, and allows us to place orders in micro seconds rather than having to place orders on the phone. Etc, etc

Yet, despite all those advances, the success rate for traders remains much the same as it was when I first started trading in the late 1960’s – a lifetime ago.

Why? And what separates those who make it and those who don’t?

Why?….Because trading is unlike any other profession in that our hardwiring predisposes us to losing. As humans we are most uncomfortable with uncertainty; we have an inbuilt need to be right. I have seen, too often, whole accounts wiped out because a trader refused to exit a losing position. And, it doesn’t just happen to retail traders; the annals of trading are full of stories of ‘professional’ traders who did the same thing and suffered the same consequences (e.g. LTCM)

For those unfamiliar with LTCM’s story: LTCM hosted the who’s who of the world of economic theory – two Nobel Prize winners in Myron Scholes and Robert Merton; it hosted a  former vice-chairman and head of bond trading at Salomon Brothers, John Merriwether; it boasted of one of the best initial  track records(after fees): first year +21%,  second year +43%, third year+41%. These are remarkable returns!

Only problem is in its fourth year (1998), it lost so much money that the FED intervened to prevent contagion. Overleveraging (i.e no money management) and refusal to take losses until forced (i.e. no risk management) led to LTCM’s demise.

So, to succeed we need to re-wire our hardwiring.

  • Rather than seek refuge in the certainty of a high win rate, we need to accept the discomfort of an unknowable future;
  • depending on our trader’s timeframe, we may need to accept win rates of 30% and 40%, choosing instead to focus on the Expectancy Return so that our dollar loss is low enough (relative to our dollar gain) for us to make a profit given our win rate.
  • We need to accept that we will cut a position and find that subsequently, and most times, we could have had a better exit.
  • We need to accept that there will be times when we will exit a position only to then have it go in our favour without giving us a chance to re-enter. And,
  • We need to accept that there will be times when everything we do leads to a loss; and, there will be times when everything we do leads to a profit – our job is to remember that ‘this to will pass’ and to adopt strategies that will preserve our capital and allow it to grow.

Easier said than done.

If trading is so difficult, why pursue it as a profession? Speaking just for me……trading is a zero-sum game. For every dollar lost, there is a corresponding dollar gain. So, if 90% of the trading population looses money, this means, as a winner, you have 90% of the population giving you their hard-earned. In short, rather than competing against you, 90% are working in your favour. In what other profession can you say that?

…to be continued……

V-Patterns

BarroMetrics Views: Vpatterns

In S&P – At Crossroads, I spoke about a possible V-Bottom in the S&P. I received a few questions from Barros Swing students about my comments.

My fault – apologies. I ought to have made clear that I was speaking about V-Bottoms in the way traditional technical analysis uses the term (See Bulkowski V-bottom) – rather than in the Barros Swing sense. Note that for the latter, we needed to see a sustained downtrend in the  18-day – something we did not see. 

Figure 1 illustrates what Bulkowski means.

This is a chart of the E-mini, continuation contract. I have placed a Geometric Gann Fann Angle to demonstrate the point I am about to make about the angles of descent and ascent being similar before the next move. The horizontal lines 187.75 and 1983.50 align with the cash levels, 1989 and 1992 (resistance mentioned in S&P – At Crossroads). 

The descent from the Sept 19 high took place between the 45 degree angle line and the 26 degree line. The ascent from the Oct low took place between the 63 degree and 45 degree angle line. Since Oct 24, we have seen the S&P start a sideways move.

Recall that in S&P – At Crossroads, I said that Oct 29 would be a critical date in defining what the S&P is likely to do next. Whatever that may be, even if we are to see a confirmed V-bottom, before the move starts, I’d expect to see prices move below the 45 degree angle.

If we see acceptance above the resistance levels, 1987.75 (basis E-mini, nearest futures month), without seeing a change in the angle of ascent, that would another confirmation, for me, that we’ll be seeing new highs.

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FIGURE 1 E-mini, Nearest Futures Month

S&P – At Crossroads

BarroMetrics Views:  S&P – At Crossroads

When the S&P first gave an 18-day Upthrust Change in Trend pattern, I wrote that the minimum target would be the 13-week line turn price.  The 13-w line turned down in the week ending Oct 17 at 1874 (Figure 1). It then gave a reversal bar the following week, and since then has rallied to 1950 (Figure 2). The question is now what?

There are two ways to view the price action:

  • From the perspective of QE, and
  • Technically.

Today, I’ll look at the picture from a technical perspective only.

Figure 3 is the S&P cash updated to Oct 23. I am using this chart to show the retracement levels.I expect any rally to move to the 1989 to 1992 area.

There are four things the S&P can now do:

  1. Rally and fail i.e. turn down and accept below the 1820 low to confirm a bear market.
  2. Rally, stall and test the 1820 low, before proceeding to new highs. Target in this case would be 2500.
  3. Form a V-bottom  and move to new highs. Target would be 2200.
  4. Form a sideways pattern between the Sept high at 2020 and the Oct low at 1820.

Of the four, I consider (4) the least likely. A rally that reaches 2012 to 1999 and turns down would suggest this scenario is in play.

Examining the remaining scenarios:

  • My time window for (1) is Oct 29. If we fail to resume a downtrend by then, we can discount this scenario.
  • If after Oct 29, the S&P continues to rally, then (3) would be the most likely. I’ll be looking for new highs to the 2200 area. We’d then need to see how the S&P reacts to this zone.
  • If after Oct 29, the S&P moves down on volume and range that suggests a correction rather than the resumption of a downtrend, then (2) is the likely scenario.

Given the above, the price action after Oct 29, will be key.

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FIGURE 1 S&P 13-w

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FIGURE 2 S&P 13w

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FIGURE 3 S&P Levels

How to Succeed?

BarroMetrics Views: How to Succeed?

John writes: “Ray, I want to become a professional trader (snip)……What are my main obstacles?”

(In his email, John indicated that in the transition to full-time trading, finances were not an issue. And, he narrowed the request for information to the elements for trading success: mind, money and method).

You have three skills to acquire:

1)  Ruthless Self-Honesty: For me this is the first and primary skill.

Let’s face it, we all lie – for a variety of reasons. It’s part of being human; we lie  to be kind; we lie to protect our own egos; we lie to…..etc etc…..(see Why Do We Lie). But, when it comes to trading, we cannot afford the luxury of lying. We need to be able to call a spade, a spade without the frills of self-deception. The great thing about trading is we have an inbuilt lie-detector – our results. No matter how much we may seek to deny their message, our results communicate the state of our knowledge and skills. I am not speaking about the results  of a single trade or a single month, but the results built over a large sample size: stats say we need at least 30 results secured over the different trading conditions (up, down and sideways trends) for the results to be meaningful.

For example, if your method suggests an win rate of 40%, and your trading is producing a rate of 18%, stop pretending all is well; stop trading and seek some help.

2) Do Whatever  It Takes: The heading encompasses a wide area.

It not only suggests a general unwavering determination to succeed, it includes the necessary ancillary skills necessary for success. In trading this includes:

  • Self awareness skills
  • Goal achievement  skills: setting goals, creating plans to attain the goals, reviewing the results to make required mid-course correction.
  • Time (Self) management skills.
  • Skills relation on focus, and how to think logically and effectively.
  • Skills relating to mind, money and method.
  • Skills in the integration of our left and right brains.

3) Setting LAHG Goals that are Tempered by Realistic Expectations.

(LHAG  = Large Hairy Audacious Goals)

I believe that one of the main reasons newbies fail is because they have unrealistic expectations of  what is possible – end of day win rates of 90%, 67% etc; average annual returns of 100%, 200% etc…….They move into the markets wanting to believe that these results are the norm. They refuse or fail to consider that what is normal for the flip side of making money, our drawdowns and that we need strategies and skills to manage those times when all we do brings in the dollars (our flow stage) and those times when all we do brings in losses (our ebb stage).

About a year ago I helped train two traders who are very close to me. They are both very talented traders with a great feel for the market. Each has different trading styles. When their training ended in September 2013 my last words were: trading is essentially risk management. You will have stretches of ebb and flow. Manage both appropriately and you have the talent to succeed and succeed well.

From October to March 2014, they experienced flow of massive proportions! But, they forgot that Ebb follows Flow, and by May 2014, both had blown their trading accounts.

Now they are rebuilding both their confidence and accounts.

Sure, we need LHAD  but, we need to temper them with what is possible. We can acquire great wealth by trading – we do this not by huge one-off returns but with patience and through the power of compounding.

Inflation? Deflation?

BarroMetrics Views:  Inflation? Deflation?

For the rest of this week, I’ll answer a number of questions raised by readers.

In the first one……

Irene asked: “I wonder if you would like to share your views as to whether the world is heading towards inflation or deflation in the next 12-18 months.  Or any other scenarios?
The various asset classes (equities, bonds, commodities) seem to be saying deflation from their current price actions.

I recall that you had been inflation-biased since 2010 or so.  Has that view changed?”

My view has not changed although your recollection needs a little jogging.

Inflation will be a problem in the US only when the funds presently held by the St Louis FED are released into Main Street. The longer this takes, the greater the eventual problem because the greater amount that will have to be accommodated.

Right now, the trillions created by the FED has done Main Street (as distinct from Wall Street) little good – because the banks have preferred to deposit the funds with the FED. And, who can blame them? The FED is paying close enough to commercial interest rates so banks can ‘lend’ for virtually no risk. Why lend to SME’s, with all their accompanying risk, when you can have the same rate of interest for no risk? I wouldn’t and neither are the banks.

The problem is without the release of the St Louis deposits, it is unlikely that the economy can start the process of real recovery – as distinct from the shenanigans perpetuated by Bureau of Labour Statistics (see http://www.shadowstats.com/).

Once the deposits are released, then the risk of a hyper-inflation led depression raises its head. The FED will have to act, and act quickly, to prevent inflation turning into hyper-inflation. Failing to do so, will bring about not only an initial hype-inflation; it will be followed by a massive depression (Weimar Republic type scenario).  But, here’s the bind facing the FED: acting quickly will bring about a whale of a recession – in other words, the FED will be damned if they do, damned if they don’t.

Unfortunately I can’t see Yellen taking the timely action that will be needed when these events unfold. Summers would have been a better FED chief for this era.

Right now, world Central Banks are posing the issue as one of inflation versus deflation; whereas, in reality, it’s one of  misallocation, and the needed correction of that misallocation. Greenspan began the misallocation, and so far the FED has refused to allow the correction. Instead it has preferred to kick the problem down the road; thus ensuring the resulting pain, when taken, will be so much more.

Consider this:

  • From Sept 7 2002 to Sept 9 2008 (2195 days), the Asset Monetary Base increased 24.74%.
  • From Sept 10 2008 to September 14 2014 (2195 days), it increased  374.36%!!

Think of it this way. Let’s say your personal debt (mortgage etc) was $24,740.00 in September 7 2002. Six years later it stands at $30860.62 (an increase of $6120 – about $1000.00 pa). This is a rate of increase most of us could manage.We would probably be able to reverse the debt.

But, if our  debt, in six years, increased from $24,740 to $117, 356.62 (i.e. increased by $92,617, about $15, 436 pa), we may not be able to manage the increase.

So, the question facing us now is: will we be able to take the timely action to pare down the debt once rates start to rise? That would depend on our willingness to suffer the pain of massively lowering our living standards.

I have attached two charts that may help you visualise the challenge facing the FED.

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FIGURE 1 FRED Asset Monetary Base, 2008 to date

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FIGURE 2 FRED Asset Monetary Base, 1995 to date

A Whiff of QE4

BarroMetrics Views:  A Whiff of QE4

Just a whiff of QE$ was enough to cause the S&P, on Friday, to close higher with a relatively strong looking candlestick  (Figure 1).  But,  the Market Delta Footprint charts showed that beneath the surface all was not as rosy. Unfortunately I am unable to show you the Market Delta chart because the PC in which the system is installed is down. I can tell you that: the while the total volume on the day for Friday was down, the buying volume was up but the buying progress for the volume seen was below average.

In short, we are seeing the return of large volume sellers – something I have not seen for a while.

Still, so far as the S&P is concerned, I am still adopting an ‘out’ overview and strategy.  The test of the neckline at 1627 (blue line Figure 1) will determine if I switch to a ‘long or our’ or adding ‘short, long or out’ to the mix. Let’s see what the week brings.

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FIGURE 1 S&P Normalised

BarroMetrics Views: S&P 2014-10-13 III

BarroMetrics Views: S&P 2014-10-13 III

A quickie because I am en route to Beijing. No blog tomorrow, blog resumes Monday.

There was a suggestion last night that Yellen would launch QE4 (Economic News 2014-10-16) despite Fisher’s denial (Fox News 2014-10-16). [Remember that Fisher is one of the two hawks on the FED, the other is Plosser. Both retire 2015, Fisher in March, Plosser in April].

Yesterday’s price action suggests that the rumours of QE4 placed the drop in the stock indices on hold. Figure 1

I can’t shake the feeling that we may be revisiting Oct 87. If so, there should be a rally tonight followed by a gap down on Monday. Let’s see  what Monday brings.

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FIGURE 1 S&P 2014-10-16

Default Future and Success III

BarroMerics Views: Default Future and Success III

Quick recap:

  • Over 90% of traders lose money. The majority of these are in the group that effect no behavioural change: at one extreme are those who do not participate in any educational program; at the other are those who participate in every program within their financial means (and sometimes programs beyond their financial means). Between the two extremes are the different nuances e.g. those who participate only in ‘freebies’ etc.

But, the one characteristic that is common to all of in this group is there is no discernable change in behaviour.

  • The next group are those that do exhibit behavioural  change without any change in results. For example, within this group we find those who invest in an education, make a genuine effort to apply the rules, and still fail to show a positive result. 

What characterizes both groups is the effect of our default future. Both groups suffer from a focused lack of awareness that the actions they are taking stem from a base that first needs to examined, and then needs remedial action.

Many, many years ago, I was in therapy. I was fortunate that I got lucky and chose wisely in my selection of the therapist. One of Dr George Lianos’ comments that has stayed with me overtime is: “if a pattern of behaviour produces an undesirable result, focus on the pattern, and not the individual reasons for the behaviour”.

So, if you belong to this group, focus on the results of your trading. Are you producing a positive expectancy return? If not, what steps did you take to lead you to this result? For example, you choice of education may be the ‘instant success’ variety. Buy ‘xxx method’ for $197; enjoy instant success spending only 10-minutes a day.

Or you may be focusing on trading and/or risk management plans that don’t suit your personality.

Or you may have unrealistic expectations of what is possible for you e.g. ‘trading an end of day method with a 90% win rate’. Is this possible? May be for the blessed minority, but probably not for the likes of you and me. Better to focus on an achievable (for all) 40% win rate that is coupled with robust risk management to produce your positive expectancy.

The reasons for failure are myriad, but if we are to succeed, it is our job firstly to identify the problem and, then take remedial action. I know, easier said than done. And for this reason, so many of aspiring traders fail to attain the results they seek. And, it is for this reason, that only about 10% who start in trading go on to enjoy the success they desire.

S&P 2014-10-13 II

BarroMetrics Views: S&P 2014-10-13 II

Last night, in no uncertain terms, the S&P negated the bullish scenario I had postulated in yesterday’s blog. This leaves only the bearish scenario.  Figure 1 shows the price action. 

It is now possible there will be a bounce to the 1939 to 1951 VAH before heading South; but then again, the S&P could just head straight for the Primary Buy Zone at 1832 to 1816.

My gut feel suggests a bounce is likely to at least the 1911 to 1893 zone before again heading South i.e. there will be a bounce that will not get to the top of value at 1939 to 1951; but instead will stop at 1911 to 1893.

But the key question for the traders is whether the underlying belief that the FED will come to the rescue will hold. The belief will be put to the test at the next (and final meeting for 2014) on Dec 16 – Dec 17.

Before that there will be the Non-Farm on Nov 7 and Dec 5 that may cause a pause or accelerate the current southerly direction. 

At this stage, my S&P strategy has changed from ‘long or out’ to just ‘out’. I’ll see how the S&P reacts to the Primary Buy Zone before deciding if it is time to contemplate going short.

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FIGURE 1