Technical 11/30/11

The last day of 11/11.

This is a very special month. This is so far the only month I took mid-month action since I started Low-Maintenance Portfolio in 2007. Things are changing too fast. We just got the worst Thanksgiving week since 1932. Now we got a super good week right after. At least we can say, we are experiencing the history.  Below is a summary of my thoughts in Nov.

On Nov 1, in Low Maintenance Portfolio - Nov 2011
I put down my plan:

I may think of add equity in the middle of the month if MF turned out to be a plain BK and Europe turn out to be not worse.

On 11/14, in What's going on?

My plan: I still need to cast more due diligence on the possibility of Year-end rally. Currently I still think it will come this year. I want to participate into a rally from 1220-1235 to 1400-1440 if everything is perfect.

In Quick Update 11/19/2011, which is posted on EST 11/18,

Now bulls' only hope is the channel to hold, which is also coincident with 50% retracement at around 1185. I think we will arrive there next Tuesday, 11/22/11 (+/- error term). 

In Art or Science, I posted my state of art chart, and gave a target of 1230s.

Not patting myself in the back, but it is just a detailed flowchart on how I think loud here, refine my plan step by step then execute it. My time series analysis gave me 11/22/11 as turning point, which is 1.5 days off. I don’t blame myself for that. From the chart, best entry point was Friday 11/25/11, yes the half day session on Black Friday.

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My mid-term target to be 1230ish which was reached overnight. To be honest, I don’t know what’s going on next. Quick changes do have a lot of impact to chart reading. I decide to do a technical Wednesday to conclude the month of 11/11.

Here is an update of my channel chart. As I mentioned, I was expecting 50% retracement, but in fact it did a clean 61.8% in the historical thanksgiving week. I tend to ignore the dip as I think it is overreaction from retails with very light volume. On Monday close, we did get a rally to pair out the loss of the thanksgiving week, and closed at 50% level at 1185 again. If we offset Wednesday and Friday loss by Monday’s huge gain, the chart makes more sense. Interestingly now we are at the top of the channel again. In fact SPX took a tiny little peek. Will it be a break out?

Here is my cloud chart. It has a long Japanese name that I can not quite remember. It is a very famous and extremely useful tool. There are tons of discussions, webpages, blogs, traders on it. For a detailed study, please refer to my friend Bob’s wiki page. Here I am showing a variant I picked up online. I always use cloud to check the trend and the quality of it.

Cloud gives a clear view. Ever since fast cloud dip below slow cloud in 11/16, /ES is declining in a clean regression channel. Things changed Sunday night. A gap up based on better than expected Black Friday Sale triggered overdue rebound. Last night fast cloud penetrated into slow cloud and found support there. Early this morning, the Bail Out World news sent ES to my target.
My mid-term target was from 1230 (in the rainbow chart) to 1243.5 above. This morning we did open and hang around 1230 for couple hours then a small wedge sent us to 1245.
Is it good or bad? We still have chance to see 1280 which is my target of extreme, but I won't give high weight on this scenario.
The 2 long, light blue hourly bars are too thin, not strong enough to hold further rally. Check the Price and Volume relation marked in the red box.
Oscillators are also not supporting further one side movement.
I am expecting a correction around 1220 area to digest the recent quick profits.

Ever since I learned volatility couple years ago, it is always my most powerful weapon in my personal arsenal. This is my volatility study by comparing VIX with implied Volatility. I am expecting a volatility dry out to the end of the year.

Stocks continue to slide as Wall Street suffers worst Thanksgiving week since 1932 - NY Daily News

Not sure what did others do. I just got a lazy Thanksgiving. The unexpected dip then reverse pattern actually has impact to my intermediate-term plan. I will discuss it further tonight.

Stocks continue to slide as Wall Street suffers worst Thanksgiving week since 1932 - NY Daily News

Art or Science

If I can choose when and where to be born (I am not complaining about my mom), it will not be hard to me. Even though 18-19th century Britain is very competitive with some big names such as Charles Darwin, Adam Smith, Issac Newton, I will still pick the renaissance 1500, Italy. Raphael, Michelangelo and, Leonardo da Vinci!!! Yes!!! Below is from WIKI.

Leonardo di ser Piero da Vinci ( pronunciation (help·info)) (April 15, 1452 – May 2, 1519, Old Style) was an Italian Renaissance polymath: painter, sculptor, architect, musician, scientist, mathematician, engineer, inventor, anatomist, geologist, cartographer, botanist and writer whose genius, perhaps more than that of any other figure, epitomized the Renaissance humanist ideal. Leonardo has often been described as the archetype of the Renaissance Man, a man of "unquenchable curiosity" and "feverishly inventive imagination".

When I mentioned Leonardo, what’s the first image jumps into your mind? To me, it is Mona Lisa. She is so famous that she has her own spot on wiki.

Couple days ago, NPR, 1 of my favorite radio station discussed a very interesting topic,
Here is the Leonardo's To-Do List

 

Thank god. Check this guy’s list. What a jumble! Cannons, wall construction, studying the sun, ice skating in Flanders, optics, and that oh-so-casual, "Draw Milan." It's like his mind could wander off in any direction at any time.

To traders, another master piece should not be ignored. Very frequently I see people debating whether trading is science or art. Da Vinci gave us the answer, there is no mutually exclusive polarities between the sciences and the arts. Vitruvian Man is a perfect example.

Fibonacci, golden ratio, harmonic numbers, all things together, we have this mater piece.

Here is my right brain practice by applying left brain technique. Happy Thanksgiving.

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It is already year end. If you are planning for donations, please consider wikipedia and NRP. Every dollar counts.

11/22/11

As I said, I want to give an update on 11/22. My evil plan is working (so far). I read a double bottom around spx 1185 level.

Is it a tradeable bottom? I don't know, but as a "doer" rather than a thinker, I turned on the risk for 50% of my equity money. Let's see what's going on.

Happy Thanksgiving. Try 1 of my favorite game, Fed Chairman. Have fun.

Quick Update 11/19/2011

As we discussed couple days ago, we are at the bifurcation. It could be a wedge which usually is a continuous pattern or a channel which is stronger and pointing down. The wedge is surely broken.

You gonna love Fibonacci numbers. We stopped right at the 38.2% of this rally, or in my words, bear market correction. Now bulls' only hope is the channel to hold, which is also coincident with 50% retracement at around 1185. I think we will arrive there next Tuesday, 11/22/11 (+/- error term).

What's going on?

How is the past week? If you just read the numbers, it was pretty much flat. Dow opened at 11983, and closed at 12153. But if you check the intraday, you will find DOW actually travelled 1000 points in the past 3 days. And yes it was right after I posted my notes on volatility. Zerohedge has a good summary.

With today's volume over 30% below average (and the lightest since July), the week ended on an up note as the Dow managed to gain just over 1% having meandered well over 1000pts to get there.

I have to say I am a little bit surprised. Is it over? Is it totally fine now? After we compelled couple whipping boys to resign, now the entire world is clean and clear. BUT, we have a little bit tiny problems here. First let’s look at EUR/USD. We know EUR has good positive correlation with equity. The correlation was very high since summer, because the crisis is from Euro-Zone anyway. Why EUR is not as bullish as US Equity?

 

 In the chart, I showed my zone to short in oval, but EUR hadn’t made there yet. In other words, EUR had not recover from the loss from 11/9 yet, while SPX made over 1.5% gain if considering the overnight trading just happening now.Here is a chart I found online, which explained my thoughts.

I expect them to convergent in short period of time. The only thing I am not sure is direction. Recall my “conspiracy QE“, beat down EUR is an easing to the US equity.

The other thing is the quality of the rally of US Equity. This is another chart I found online.

The author, Kimble says, “So whats new today compared to Monday morning? Not much... some new leaders have been put in place in Europe and key resistance lines remain!”

add: My chart on DOW

This is a 30 minute chart of Dow-30. From the chart we can see how indecisive the market is. The peak line is pretty clear. If it is a channel marked by red line, then market should correct to 11,500 area. If it is a triangle marked by light blue, it will be a weaker pattern. It could either go up from now or retrace to the low bound of the triangle then go up.

My plan: I still need to cast more due diligence on the possibility of Year-end rally. Currently I still think it will come this year. I want to participate into a rally from 1220-1235 to 1400-1440 if everything is perfect.

http://www.thestockadvisors.com/Main-Section/Timely-Ten-The-best-blue-chips.html

http://www.thestockadvisors.com/Main-Section/Timely-Ten-The-best-blue-chips.html

Bold Prediction?

People love to make bold predictions. Then they tend to forget the bad ones.

Nov. 8 (Bloomberg) -- Neel Kashkari, head of global equities at Pacific Investment Management Co., talks about the outlook for global financial markets. Kashkari speaks with Betty Liu and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

What is Volatility

What is volatility?

A friend asked me to clarify and quantify volatility I am talking about. For a more standard definition, you can find any finance textbook. Let’s discuss a little bit of my understanding here. In the financial and economy market, the No. 1 key word is expected / forecast / predictable. For every major econ or fin activity, there are bunch of analysts covering it. They will forecast it and the range of the forecast will be priced in before the event. Risk is defined as a departure of the forecast, to either side. A significant and constant departure actually means difficulty of forecast. If there is so much uncertainty in the near future, people tend to be “risk-off”.

Here is an example of predictable price behavior.

If the market is efficient, we should expect fluctuation. People need to have different opinions to form a buy-sell opportunity. Overall, treasury stays in its price channel with manageable movement. Overall in a long run showing in this chart, you roughly can make 300% easy and comfortable return over 30 years of time. The chart on bottom has a totally different look. It did not want to stay in lane, raised too fast and ruined the price channel. The damage was in 2000 and we are still paying it back.

In the stock market, an easy proxy of risk and volatility is moving average and standard deviation. Statistically, 2 Standard Deviation explains 95% of the movement in a normal distribution.

Standard deviation is also important in finance, where the standard deviation on the rate of return on an investment is a measure of the volatility of the investment.

Here is wiki Standard_deviation

Based on this concept, John Bollinger designed an indicator called Bollinger Bands. The default setup is 20 period moving average as the middle line and 2 STD on each side. Just think of it like a 2 lane road. When you are on the road, you want to be a nice driver. You should make yourself predictable, not too fast or too slow, stay in your lane. If the car in front of you is not only speeding, but also playing a zigzag game, hitting the shoulder on the left then hit the curb on the right, what do you think? I will take the closest exit and find the nearest Starbucks for a break. After things cool down, I will go back to the road again.

How about opening gaps? Gaps are caused by overnight trading in other markets such as Asia and Europe. If gaps are too big and too often, that is also a kind of volatility I don’t want to deal with. So the car in front is actually transformer. Instead of keeping on change lanes, this car is jumping from left to right.

Here is a chart showing some recent reckless driving of SPY which is the Electronic Trading Fund for SP 500 index and a good representative of the overall market. 

Check the details. How many times it hit the curb? How many times it was driving off-road? How many gaps that I cannot handle?

AGAIN, in a long run, it is not how much money you make, but the risk management, or how much money you avoid to lose, that protects you. Inflation and interest rate adjusted peak is in year 2000, unadjusted peak is 2007. If you buy at peak, you are still losing money.

Low Maintenance Portfolio - Nov 2011

Short summary: Long 40% bond, 20% Gold, 40% money market.

No I don't buy it. I don't like the market movement despite a crazy October. I shall always remember my research with a guy COB. It is not how much money you make but how much you avoid to lose counts in a long enough term. Cash is still king. I put another lot (20%) into mid-term bond, holding Gold from last month and have the remaining 40% in cash.
Recently the seasonality shows trend turn every month and extreme every Monday. The market is far from being stabilized. 1255 was my upside correction target. I believe last weeks rally above 1255 are all short-covering. I count it as wave 2 peaked at spx 1293. I am expecting bigger movements in front.  I think spx need to revisit 1074 which is the low of this year.
Interestingly, when I was googling fancy wallpaper, I found this chart.

Don't know who the author is, but I like it and decide to post the link here. Tip off. :D

This month REIT actually turned positive, but again I don't want to buy it. Here is a report from Big Picture indicating a soft housing data. There is nothing wrong to play conservative. I will at least wait for another month.

Other evidence including the MF bankruptcy news such as this one, and my reading on EURO chart below:

Closing statement: November will be interesting. I may think of add equity in the middle of the month if MF turned out to be a plain BK and Europe turn out to be not worse.

Early episode:
Low-Maintenance-Portfolio-2
Low-Maintenance-Portfolio-1
“The Ivy Portfolio”.


BTW, somebody keeps on asking me about AAPL even though I keep on telling him/her I am not going to cover AAPL anymore. Anyway, here is a picture for that person. enjoy :D