Bear market intact ?

[sifts2win]

🙂
Greetings fellow traders,

Thought I'd pop my head up above the parapet and declare that the Dow is now ripe to start its final descent into the abyss. Any takers ?

My assumption is based on the fact that the weekly chart is still in a downtrend with the 21 week ema still acting as resistance and 9000 still waiting to be overcome. We have 2 daily closes near or at the top of the bar and a nice naked high looking suspiciously like a bull trap or false breakout to me.

My trading style dictates that this is very nearly a perfect set up for a low risk short trade on a medium term basis. I shall be looking for the first signs of a breakdown in the hourly and 15 min charts with a wide stop somewhere just above the previous days intraday high for starters.

I would welcome your feedback on this idea folks, how it could be analysed better and how if it occurs we might maximise our gains ?
😉
Thanks

 

[ChartMan]

That's my reading too, but I'm having doubts because of its strange behavour. If it does drop, stay short whilst the price is unddr the 100MA on a 1 min chart- that should maximaise gains...

 

[sifts2win]

Thanks Chartman,
your posts re. 100ma's on 1 minute charts make interesting reading. I shall have to invest in some realtime software etc. and start to follow these ideas more closely. Have been using free stuff from the net and the limitations are becoming very obvious !

No. 1 on the Xmas list .

 

[BeM]

I might as well keep my idea for myself and save being wrong... but it's okay.
I believe the thing is that the US markets technically speaking show bullish signs, of course, but we know that TA doesn't always predict the future, it can just prepare the background. I think that there is no fundamental worsening, either economically, politically or psychologically, that could creat a real downtrend for now, well unless something very unexpected happens. So I am looking for an uptrend, and maybe if anyone goes back to my posts very early at "thought for the day" I was bullish also at that time, but we are getting near to the upside resistence level, which I think could take some time to break.
😉

 

[sifts2win]

Hi BeM,

Its ok to be wrong, who knows what's going to happen next. Its just about trading the move right ?

I thought I would add that I've become quite contrarian and its precisely when it all looks obvious, when everyone agrees there's a rally for x,y,z reasons that I start to take notice. I think there is compelling evidence, in lots of areas, where the market moves against all the obvious signals and is a huge factor in why most traders lose money.

How many times have u seen level 2 screens showing huge buying volume and yet the price drops all day for instance ?
Too many people are calling for a Xmas rally and the technical signals back up the trend too nicely for me.
I am expecting a sudden plunge for no good reason, precisely because 'new' money has entered the market and the pro's are going to take it away just in time for the holiday. I suggest the market makers will just suddenly write down the prices at the open in the not too distant future and catch the majority completely unawares.

Of course this could all be complete rubbish but I'm watching very carefully now !

ttfn.

 

[tradesmart]

Sifts - good analysis, I'm a pessamist too.

The markets are severely overbought at the moment and are due a sharp correction.

They've been on a rocketship since October, and what goes up must come down.

Time and time again recently we see buys outnumbering sells by a large margin yet the prices go down.

The market makers will be looking to fill their boots with cheap shares to flog off at a huge markup later on.

When the sharp correction happens, the next leg down of the bear market will begin and everyone will know whats going on.

When Microsoft has a p/e of 10, perhaps that will be the bottom.

TradeSmart

 

[RogerM]

Here is a 200 year semilog chart of the Dow, crucially, adjusted for inflation. Sobering implications for where the next 6-8 years may be leading.

 

[ChartMan]

From a quick glance. it looks like it might fit. Looking closer, the probability of it fiting is close to zero. My observations on the dow are that it is likely to bounce off the first uptrend channel support line. This would keep us in the 8-9000 ball park. Straight down the "Roger" line implies 1930's type recession stuff. nlikely, but not impossible.

 

[madasafish]

well we can be sure of 1 thing: whatever the majority view is it is wrong.

This is the first rally where no-one says it's the bottom , end of bear .. cos they've been wrong so many times.

Just look at the daily charts.. last (Aug) high nearly approached . All this stuff re overbought/sold is just so much carp.. The marrket has been oversold for 2 years, in a bull market it's overbought for years.

We either have a continued rally or a fail. So far it has been slow and heistant. not just kick up fueld by short closing. The consolidation pattern October - mid November could mean we go a lot higher.. or we could fail.



If we see Dow sub 5,00 I repeat what I said elsewhere: that means a world financial collapse. Do you think our brokers and banks will be here to help us trade it?

Most will be bust.. so it is unlikley to happen quickly (it may happen but slowly - see Japan which has taken 12 years to fall from 40,000 to 8,000 and it fell from 20,000 to 8500 in the past 2 years..

So the lesson from history is: you have no idea of the future.

BUY JAPAN: big market recovery started...

 

[tradesmart]

madasafish,

My crystal ball has a 90% success rate and my tea-leaves are infallible so the future becomes a lot clearer for me…………..

Also there is a concept of short term overbought/oversold, particularly in respect of the markets rise from the October lows which has been far from slow and hesitant! – due for a sharp correction soon.

If the Dow goes down to 500 the Hedge funds will have made trillions shorting it and they'll prop up the world financial systems and prevent collapse.

You’re right about Japan though……….. 😉

 

[sgrech]

BUY JAPAN: big market recovery started...

What evidence are you basing this statement on??

Simon

 

[RogerM]

To answer the original question about how to benefit from any plunge, I would suggest the use of an option. The example below is for the ftse100, but the same principle applies for the Dow or S&P500

You could of course sell a future, represented by the green line in the payoff diagram below. This is the purest form of speculation, and the position will gain or lose for each point that the ftse moves for or against you. So your overall view may be correct, but would you really have the balls to hang on in there if the ftse first of all moved 150 points against you?

You could buy a January 2003 put option with a strike price of 4125, represented by the blue line. Based on Fridays close, this would cost you £1250 per contract, and if the ftse does not fall below 4125 by expiry (17th Jan 2003) it will expire worthless. Upon expiry it will be worth £10 per point for each point it falls below 4125, and so breakeven upon expiry will be at ftse 4000, and you will be in profit at all levels below that. However, if the ftse falls immediately, you will go into an immediate profit, as shown by the pale blue line, but in the event that the index stagnates at current levels, time value will reduce steadily until expiry occurs at the dark blue line, and you will have lost your £1250 premium.

Or you could sell 2 call options at 4425 for £375 each, and use the premium raised to buy a 3975 put option for £815. This is known as a 1x2 split strike short synthetic, represented by the red lines. This will cost you just £65 net because all but £65 of the premium required to pay for the put option will be provided by the premium received from the sale of the 2 call options.

In the event that the index rises, you will have a loss if you wish to liquidate the position immediately, as shown by the thin red line. But if you hang on until expiry (17th Jan 2003), there will be no loss other than the initial net cost of £65 provided that the ftse does not rise above 4425. But above 4425, losses increase sharply as the short calls go into the money.

If the ftse falls, the position is similar to that of the straight forward long put, i.e. immediate gains in value - the advantage being that in the short time you can give the position room to move against you without it costing you anything if you hang on until expiry, and you will not lose anything (other than the net £65) on any move against you below 4425. The heavy red line shows the position at expiry.

Synthetics are a regular part of my option trading.

 

[sifts2win]

Thanks guys,

there's a lot of opinions out there and I appreciate the replies. I like your 200 year chart RogerM, now that's what I call a major trend !!

Have you calculated the fib retracements from the high to the 1982 low ? Would be interesting to see where they intersect with the lower trendlines.

Your text on option trading reminds me why I gave them up though. That's so complicated !! My brain just about handles pure futures. Think I'll stick with that process despite the obvious ability to spread risk when you understand all those option strategys. A great piece for learning though so thanks for that.

Strangely I've been telling anyone with some cash to buy Japan, but who really knows Madasafish. Like you say consolidations or slow recoveries can break down as well as up and no one knows the future, so just trade against the majority is easy stuff to say. My case was that the probabilities have stacked up to offer a fairly low risk opportunity to go short and maybe catch the start of a humungous collapse!! (And then trade it properly for max gains )

Tradesmart I agree with the tea leaves and the hedge fund scenario. Why shouldn't there be a financial collapse. Looks like China's going to take over the planet in the next 10 years to me anyway, even without Armageddon in the Middle East. (Cheery thoughts eh!).

 

[bigblue]

My article for Hedge Funds Review (Dec 2002)

Thoguth I'd throw my hat in the ring!

This yearly chart of the Dow Jones goes at least some way to proving that markets have been, and continue to be, defined by a uniform behavioural pattern that shapes their evolution. During my association with this methodology I have seen this pattern assert itself across every asset class, every stock, currency, bond, commodity. Neither is the pattern isolated in one timeframe; the pattern is fractal in nature so that in whatever timeframe you care to look, this same pattern of behaviour is still there, just the same.

To explain further, I believe that the upward sloping lines that define what I call a ‘Bull Channel,’ are the parameters for perfect harmonious, sustainable growth. Deviation to the channel above indicates the perpetuation of what is commonly known as a bubble. Deviation below indicates obvious weakness and that something has gone fundamentally wrong.

Using the example of the Dow Jones, the excessively strong move up has caused the natural equilibrium of markets to become destabilised. Generally, when a market, having broken out of the original Bull Channel, eventually reaches the next upward line of support, this is always enough to spell out, not only the end of the excessive gains, but also the start of a protracted correction to work out those excessive gains. In every instrument that has exhibited this type of behaviour, the outcome is always the same. We can confidently expect or predict a retracement to the lower upward sloping line of the original bull channel in all instances. I have never seen any instrument defy this rule.

My analysis of the Dow Jones therefore leads me to predict that it will have to retrace to the lower of the two market upward sloping lines, or 4150, were it to sink this year. This, although unlikely, is the risk in this market currently. If it does not happen this year, then it may be next, but to me it seems inevitable, the severity of the collapse will depend on how well it is managed. The exact level of support rises dynamically as each year passes and the upward sloping line of support remains unchallenged.

It is clear that the Dow, S&P 500 and Nasdaq are not cheap historically by any measurement and certainly not at levels from which new Bull markets tend to emerge. The Dow in the low 4000’s with a P/E in single digits for example, might prove an attractive entry point, long term. A break of that line of support would be catastrophic, but I am struggling to think of a scenario, other than nuclear war, God forbid, that would mean that we would have to hand back all the productivity and efficiency gains made over the last 70 years, although the increasingly obese trade deficit in the US does give grave cause for concern in the long run.


There is another interesting point to note from this particular chart by which I am referring to the link between the peak of the bubble of 1929 and the peak of the bubble of 2000. The position one places the Harmonic Grid over the chart is of course of paramount importance but it is relatively simple. In the case of this chart the Harmonic Point is the peak of the 1929 bubble. From that peak we can see clearly that the upward sloping line extends perfectly to the 2000 bubble peak. Is this coincidence? I seriously doubt it.

 

[madasafish]

lETS THINK IN TERMS OF FUNNYMENTALS FOR A MOMENT...Yes I know as a chartist they mean little short term but long term they define everything.

1. US major companies have $buillions pension fund shortfalls which they do not fund as US accounting lets them assume a growth rate in pension assets of say 8% and say "we're all right Jack" although the actual growth may be negative. (Confused? Sounds stupid? well it's real. After all these are the people who gave us Arthur Anderson). If these deficits were recognised most US major companies would see reported earnings fall by about.. 25%!


2. The Dow Jones dividend yield is about 1.5%. With US base rates around 1.75% that means the risk premium to hold stocks versus cash in the bank is negative! (ignoring capital growth).

Now the normal (if there is such a thing) premium averaged around 2.5%.. so US dividend yileds should be around 3.8% on a historical basis.

So
1. US companies are at present on earnings overstated by 25%
2. Yields are far too low.. by a factor of 2-3

If these were to correct tomorrow the Dow would fall to about 3,000.

Since the US government would not want such a thing to happne (every US bank would go bust), we can assume sideways motion and sudden falls.. (look at the Nikkei chart over 12 years)...

If that did happen and the FTSE fell in proportion to the DOw FTSE 100 yields would be around 9%.

Cheap? well certainly attractive.. (pity all the insurance companies and pension funds!)

 

[sifts2win]

'My trading style dictates that this is very nearly a perfect set up for a low risk short trade on a medium term basis. I shall be looking for the first signs of a breakdown in the hourly and 15 min charts with a wide stop somewhere just above the previous days intraday high for starters. '

Well I don't hear any gasps of astonishment ! Unfortunately I was unable to watch the market this week and missed the sell signal on Monday (Oops signal - failed gap at 9000 ish resistance.) Did anyone else catch it and did u see it the same / where did u enter/exit etc.?

Mr. Smug (new name)

 

[RogerM]

The Jan 2003 "1x2 split strike short synthetic" described above has now expired with a profit of £1435 per strategy (a strategy being 1 long 3975 put and 2 short 4425 calls. I actually closed my position just before Xmas for +£1200 when the ftse was at 3925. Although I would have done better to hold on until expiry today, the extra 100 points would have been largely negated by erosion of time value. With options, if there is a quick profit on offer - best to take it. But it was all very low stress stuff - the FTSE would have to have risen above 4425 before I started to lose any money - always a low risk I would have thought, and a negligible one during the whole of January so far. Also something that you can combine with a day job or other activities for those with a life outside of trading?

 

[RogerM]

Looks like we may have seen the completion of an ABC correction in the S&P500. In any event, the 840-842 resistance level kicked in pretty hard.

 

[FTSE Beater]

Hi RogerM

I was just wondering. Isn't the 5th wave supposed to be a final big wave?

I haven't really studied Elliott Wave though 🙁

 

[RogerM]

Based on my limited knowledge of EW, 3 is usually (but not necessarily) the longest, but cannot be the shortest. Also the top of 4 cannot overlap the bottom of 1.

In this case 1 is the longest and 5 the shortest, and 4 and 1 do not overlap. So as far as I can see none of the rules have been broken.