Friday, July 9, 2010

TF Daily Swing system takes short - ES adds short contracts and comments

Market feels like it has been in full blown bounce mode prior to earnings season. Perhaps shorts profit taking or being squeezed prior to earnings season is contributing to the rise. However, I would like to point out that internals continue to be terrible. People have been selling leveraged risk all the way up on this bounce - and that is a really bad omen. You can see that in the reDeleverage analysis of SPY and BGU below. The leveraged BGU (gray bars) is selling at a discount to the cash SPY index and the trend has been increasing. This version of the analysis is a longer term view than the normal version that I generally show. 

Apparently, Jon Paulson (Steve Cohen etc...among others) are long everything that can be found - I am betting that that decision is based more on the same kind of gut move that got him into all those abacus CDS shorts than fundamentals or sound judgement (though that former idea had a fundamentals basis and required gut not to mention help from Goldman Tax and friends)...can't help but wonder about it this time. What happens to the market when a few over leveraged 30 billion firms are wrong?

In any case, the subject of sentiment is an integrally related issue and the above demonstrates that sentiment is still bullish. Theory says that the market is not bullish enough for a big selloff based on a bullish percent of 18% or so. I think there is reason to believe that we have not really bounced and have not reached enough of a bearish extreme appropriate for a substantial rally given overall market conditions.

I would like to point out a few things: 
  • The above comments regarding long positioned institutions/HF's demonstrates that we have probably not gotten bearish enough to rally. Nor have we reached extreme bearishness either...something you would have expected to see with nasty volatility like has occurred. In addition, after the volatility that has occurred in market since may - to the point of panic - the market has become virtually untradable for most participants. I know of a few funds that do not have the choice to trade anymore due to all of the insanity. So, I think we have been too complacent to put in a bounce of significance. 
  • In addition, the concept of A-B-C down does not fit well on the weekly chart of the SPX. It does not measure well without a new low and a new low will most likely setup a larger down move not a C. 
  • Overall, very interesting action on very low volume with nearly every leveraged ETF risk trade being sold at a discount to cash in every market I have checked. 
  • In addition, we still have big relative strength discrepancies in major markets/sectors that should be showing strength right now...and distributive internals.
  • If the market were to attempt to rally further, there is quite a lot of "50 day MA" resistance above nearly every one. 
I think that its important to consider that the market has just not gotten bearish enough. And its at moments like these that its easy to miss big trades or get caught wrong footed.  Just some food for thought.

One other point, Monday's have been bullish and responsible for over 80% of the entire points gained since March 2009...perhaps just to fool everyone the market magicians will start bullish Friday's and Monday Madness. Start watching the historical Monday's.
I am doing a substantial new release this weekend of all the RVS and HLA systems. The last trade is slightly different due to the changes but essentially the same performance stats. TF System shorts the close as expected and ES System adds.

As expected a little more update

TF Daily Swing system will take a short on the close for an opening position and ES Daily Swing looks like it will to add. Remember earning season starts monday with Alcoa.

Pretty much as expected...

The market sold mildly and then closed solidly on very low volume. This resulted in short position additions at the close. Ideally there would be more follow through tomorrow, though I am not anticipating much, which would hopefully get systems shorter. So far the Russell Swing Futures System has not triggered short but will likely do so tomorrow if the market does have some upside. This would certainly be a powerful signal. I would like to state for the record that given the internals I am seeing, there is potential for tremendous weakness in addition to a large volume of reversal or loss of momentum candles in stocks and index ETF's.

Thursday, July 8, 2010

BGU 34 minute system

As I have indicted fairly emphatically before, during times of transition, which the last 2 months have been, I prefer to focus on swing decisions and less frequent trades...the markets, especially this one are not sympathetic to medium term trades and the BGU system sits at its risk precipice. It will be interesting to see how this trade pans out. I am posting this chart because there was a request regarding the shorter term activity. You can see the PL curve at the bottom of the chart.

ES Daily Swing Short addtional contracts at the close

ES Daily Swing Short

Wednesday, July 7, 2010

Market Update

Depsite a strong rally...people wanted out at the close...even the shorts were not buying. Additionally the spread between leveraged and leveraged inverse ETFs are at nose bleed levels...this usually reverts back to parity with market weakness.

Lastly, the Russell is usually a leader and can give an edge. Theoretically this index should be at 645 to 660ish by now. It got crushed relative to the SP500 which is now very expensive vs the Russell.

Additionally, Goldman Tax said today "Bottom is in". Given the fact that you would have lost 300% of your collateral requirements or more based on their EURO calls over the last 3 months...I would say they bought when they recommended to short...and sold when they recommended to go long. I wonder what their case is with the equity markets? Reason enough to be very careful is the idea that Goldman and friends are selling into it while telling everyone else to buy. 

The ideal setup for the market would be to see mild selling if it were to occur tomorrow...followed by a reasonable close. This could allow us to move up to the 1070 to 1090 area which would likely be shorted by nearly all of the swing systems. Keep in mind that given the weakness under the covers of the rally today, upside follow through from here is optional not necessarily most probable.

TF Daily Swing system update

As a follow up to my earlier post. I would like to add that many of my other systems are beginning the process of building short positions. Additionally, I wanted to put today's loss in perspective for the TF system. This market has whipped around almost everyone except the the best short term systems or the best discretionary traders....and the front-running HFT, Goldman Sachs, JPM, Morgan Stanley etc guys. The Russell Daily swing system is right on plan and should continue to produce good results. This loss is NOT a drawdown it is in fact a well managed trade. The market may possibly probe a little higher tomorrow in the AM but its looking rather like there may just be too many optimists out there. Today, of-course, was a classic short squeeze, lets see if its a bull-trap. I personally suspect it is.

Below is the equity curve including the last trade which gave back around $18,000. This is a good example of how to trade with proper allocations. Trading with systems that give you too many stop outs create the same amount of risk as systems that take too many drawdowns. People's perceptions related to these elements are usually too optimistic. In this model, assigned risk capital is $50,000 and the average trade size is $20,000 or so. Today, we closed a loss on a trade that is equivalent to the average trade size. This loss represents 36% of the at risk capital but the at risk capital represents 20% to 40% of a reasonable allocation. Therefore, to trade this system with $50,000 max trade size in leveraged futures markets the allocation should be roughly $250,000 to $300,000. This loss therefore represents a 5 to 7% move in this allocation. It is common for people to over leverage. Trading involves risk, you do not get paid for feeding the ducks, so you need to think about risk in perspective to an account basis. Given that, we also need to understand that the position taken by this system on the last trade represented about $780,000 of notional equity. That's quite a lot of market exposure. While the system is remarkably successful and trade with 95% winning trades since inception, if one were to freak out over a $15,000 to $18,000 is not because the system is not trading well its related to being over allocated in relation to liquid assets. The results below, therefore demonstrate, an average trade size of less than $20,000 with a max trade size of $50,000 since the inception of the TF futures contracts. There is no reinvestment of profits or compounding. The results represent an annualized return of 26% based on a reasonable allocation of risk capital. Given that at anytime the capital in the market is less than 7% of asset allocation...these results are all the more attractive.

I recommend that people think carefully about how much money they are placing into the market and how much of their liquid assets are required to generate a return. It is my impression that most money managers are WAY over allocated to risk assets.

TF Daily Swing system takes loss

Now for something completely different...

Everything is broken...

ES Sets Cycle Low

What the significance of the reaction is will clarify as we progress. However the next bearish daily cycle will likely be an important point to examine - which I will do on at that time.

Tuesday, July 6, 2010

JP Morgan then and now

If anyone is intersted to understand the reason that JP Morgan Chase keeps getting the gravy deals from the government and the Fed...there is quite a lot of precedence...fake accounting and all. Also, please read: More dollar what-if discussion this is a post I wrote last year and paints a clean picture if the lengths to which central and fractional reserve banking goes to short currency into existence.

Monday, July 5, 2010

Iceland could solve all its problems...

...if it followed Trichet's advice and became eligible for loans it can not possibly repay. How in the world could that seem like a reasonable plan? Even Obama's finance team might hesitate for a half a second on that one. But, what's amazing is that the ECB seems to think it was reasonable and they are in charge of the current fiasco - this certainly reinforces my lack of confidence in their confidence game. All Iceland really needed was to join the G-20 and then they could have setup a police state to forcibly take money from people without their cooperation.

The master coverup plan by the Federal Reserve and the US banking system was to implement a massive accounting fraud via derivative's based liquidity generation - please read Derivatives...what the heck were they for? which I wrote regarding the use of derivatives to create the illusion that there is enough money to cover the fractional reserve debt money obligations.

Sunday, July 4, 2010

Happy Independence Day

May we all celebrate independence and freedom for many years to come. If there is any key thing to really think about this year, its that we need to remain keenly aware of what freedom and independence are and when they are being abused or manipulated.
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