how to use this site

This page discusses how pebblewriter.com works: my process and how it is implemented and communicated here on the site.  For a discussion of my investment philosophy and strategy, please CLICK HERE.

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What to expect

Everyone has different investment objectives, risk tolerance and cash flow needs.  So, I post primarily about the S&P 500 (SPX) which is highly correlated with most stock indices and individual securities.  So when, for instance, I suggest a long position, you can use that information to go long SPY, ES, or any number of other securities that fit with your investment profile.

Each month, I post a big picture forecast that includes stocks, bonds, currencies, and select commodities.  These posts are intended to give both buy-and-hold investors and swing traders a general sense of what to expect for the coming month or longer.  I then update and qualify this forecast as needed in each daily post.  The posts are additive, so if you’re going to take a few days off, it pays to go back and see what you’ve missed.

For an example of a typical daily post, CLICK HERE

I try to fit my recommendations to what the markets offer.  There are many times, for instance, when the market is in a holding pattern — not sure which way to go (e.g .impending central bank announcements, conflicting economic signals, etc.)

These periods are not particularly conducive to swing trading or buy-and-hold investing, but might still offer opportunities for day trading or scalping.   A day where SPX bounces back and forth several times by 10 points, for example, would be a bust for swing traders, but potentially lucrative for day traders or scalpers.

My initial post each day usually offers a price forecast for SPX as well as an overview of the forces I believe will be at work that day. Stock prices are heavily influenced by not only the news flow, but by algorithms which are driven by the price of other securities (e.g. oil futures (CL), the dollar-yen (USDJPY) and the volatility index (VIX.)  So, I typically delve into what to expect from each of these.

A post will typically begin with a suggestion that one go long or short until a particular price level is reached, at which we point will look for a reversal or a breakout/breakdown.  Sometimes the target price is only a few points away, so the recommendation will remain in force until the target is reached.

Other times, when markets are choppy or if I expect substantial bounces on the way to the target, I’ll post intraday trade advices that offer traders the opportunity to play those bounces.  Therefore, there are some days with no intraday trade advices and others with as many as 8-10.

As a general rule, I try to limit these intraday advices to situations that I expect will offer at least a 5-pt bounce.  But, of course, sometimes the market has other things in mind.  It’s not unusual for head fakes to occur at turning points or for stocks to pull a V-shaped rebound out of thin air.  So, I always recommend that traders use appropriate stops when taking a position.

“Appropriate” means different things to different investors, depending on their investment horizon, the choice of investment vehicles, leverage, tax status, etc.  An e-mini trader leveraged 20X, for example, should use different stops than an unleveraged, buy-and-hold investor trying to maximize after-tax returns.  I generally suggest a 3-pt stop (on SPX) for unleveraged investors with no tax sensitivities

I always try to explain the reasoning behind my forecasts.  This makes it easier for folks to apply the same principals to other securities and also to compare my forecast with others they are considering.  I don’t pretend to know better than everyone else all the time (just sometimes.)

I also try to convey the degree of my certainty.   When I’m really torn between two directions, or see the risk as being unusually high, I try to convey that.  It doesn’t happen frequently, and is usually the result of TPTB trying to wring the last cent out of bears before an upturn.

I don’t advocate that traders hold long or short positions overnight or over a weekend as, lately, the manipulation that goes on in the futures markets is out of control.  Swing traders and buy-and-hold types accept this risk and position themselves accordingly.  To each his own.

My process

It will help to understand some of the terminology I use — especially the harmonic terms with which most investors are unfamiliar.  They are explained under the “learn” tab.

I usually begin a forecast by observing major trend lines and channels (parallel trend lines.)  What do they say about the long or short-term trends?  There are usually relevant channels that slope both up and down. And, it’s not unusual to have channels within channels within channels.

Smaller degree channels often run counter to the direction of larger degree channels (i.e. corrective waves.)  When they intersect, it sets up a conflict.  The larger channels usually win out.  But, one must take precedence over the other, creating an inflection point where things will either change — sometimes dramatically — or continue on the same path.

These can be very valuable warnings of impending changes that, to the unaware, pose a risk.   To the prepared, they represent a great opportunity.

In late May 2012, the dollar was approaching the top of a large, long-term channel where it intersected with two smaller ones as the equity markets plunged — down over 10% since we first shorted in April.

On June 1, the dollar spiked and tagged the channel top, helping to convince me to call a bottom in equities.  SPX bottomed the following day and rallied 16% over the next 3 months.

Once I have a sense of what the channels indicate, I look at Harmonics.  Like channels, Harmonic Patterns can be nested inside one another and often conflict.  They can also evolve, such as when a Gartley Pattern completes at the .786 Fib level, but goes on to form a larger Butterfly pattern, or a Butterfly completes within the XA leg of a larger Crab Pattern.

They operate on different time scales.  Multi-year patterns, such as the Bat Pattern that signaled us to short on September 14, 2012 at 1474, are easy to spot.

Shorter-term ones are tougher, because they often conflict with one another.  It pays to track them all, even those that don’t agree with the current forecast.

For one, it helps to know whether any given day’s price action helps or hurts my current stance.  More important, though, they often hint at impending trend changes — which helps me anticipate tops and bottoms.

The same can be said for other Chart Patterns such as Head & Shoulder patterns or Wedges.  It’s not unusual, for instance, for a Rising Wedge to set up in the right shoulder of a H&S pattern as seen in the chart below.  When this occurred in April 2012, it helped us time our short entry very accurately.

And, when the patterns “bust” or don’t work out, I know that my assumption was wrong and I need to change my stance.

Recognizing and correcting a mistake is at least as important — if not more so — than making good decisions in the first place.

I also look at correlations between patterns in different assets.  Currency pairs, for instance, often tell us much about what to expect in the equities markets. This was especially true in 2013-2015, when the yen carry trade drove almost all of SPX’s advances.

The less certain I am about a particular chart, the more I’ll look elsewhere for confirmation.  Other indices such as COMP, RUT, NYA and e-minis have often provided hints when SPX was tough to forecast.

Once I have a price target in mind, I try to work out the timing.   Factors such as Fibonacci time ratios, options expiration, Fed decisions and news flashes can all play a role in the timing of price movements.  Contrary to what they teach you, markets rarely follow a “random walk.”

Once I have a set of forecasts that agree with one another, I’ll ask myself whether they make sense given what’s going on in the world (financial and otherwise.)  What’s the financial press saying (hint: usually wrong)?  How is earnings season going?  What about seasonal or cyclical factors?

2011-v-2007-side-by-side-1024x594About once or twice a year, I’ll find an interesting analog: where the market repeats a prior pattern.  Often complex, analogs can be enormously profitable.

This one, where 2011 repeated 2007, enabled me to call the 20% downturn that began July 21 to the very day and within 3 points of the actual top.

I rarely look at other analysts’ opinions.  But, when I do, it is always after determining my own forecast.  I’m loath to develop a bias based on a theory I don’t understand that well.  After a spectacular first eight months in 2011, I gave way too much back over the next six months when I bought into the prevailing Elliott Wave P-2 script.

I’m often told that my style resembles that of one analyst or another.  And, I’m frequently asked whether I agree with a particular person.  It’s not that I’m smarter than anyone else, but I really try to avoid such questions.  They require a level of familiarity with someone else’s technique that I might not have.  And, they can be a real distraction.

Having said that, if a member comes across a really compelling conflicting forecast, I’m certainly happy to entertain it.  Just make sure the question includes an explanation of the other guys’ reasoning. I just don’t have time to become an expert on the effects of solar flares and rising hemlines.

Implementation & Communication

Sign up for email and text notifications of posts and updates to posts — available in the column to the right.  Notifications go out with a minute or two of a post being made.  I use Twitter for intra-day notices when something significant happens, but a small lag is unavoidable.  Members are strongly encouraged to follow @pebblewriter and, for intraday trade alerts, @pebbletrades.

Markets generally move in concert (or opposite one another.)  So, when the S&P 500 crashes, you can usually expect to see the NYA tag along.  For this reason, almost all of my daily posting is done around the SPX and its drivers — USDJPY, EURUSD, VIX, DX and ZN.  So, subscribers have to do a little extrapolation if they own something slightly different.

If one wanted to track along with what I’m thinking, it would be a pretty simple matter to buy an ETF such as SPY at the bottoms and short it at the tops.  I would strongly suggest one closely monitor the site, though, because I sometimes opine on short-term and intra-day swings when warranted.

I don’t usually post when things are right on track.  I use these periods to update my charts — a constant process.  But, I try to post as quickly as possible when I change positions.  There’s usually a lag of 2-3 minutes, because that’s how long it takes to make a chart presentable, post it the website, and add a few thoughts.  But, if you’ve been following along, you’re probably already aware that some line just got crossed or price target reached.

If you’re an active trader, or simply have too much time on your hands, I recommend refreshing the web page often.  Some days are dull or the markets are trending, and I’ll only post first thing in the morning.  Other days, especially when it’s choppy, I might post 8-10+ times with thoughts on intra-day swings.  It’s up to you how to use the information.

One warning: I’ll sometimes end an update with “back in a few” or “more in a minute” only to become unexpectedly immersed in a new or puzzling development.  Needless to say, many minutes (or even hours) can go by before the next update appears.

If you ever find yourself wondering why I haven’t updated a post even though one of my forecasts is stinking up the joint, odds are I’m studying it intently and/or preparing a new update.  Please be patient.  Also, I can’t watch every market every moment of every day; so, I’ll occasionally miss stuff while shuttling a daughter to school or a volleyball match.  But, I do my best to stay connected and will let folks know if I’m going to be out of pocket very long.

Even really clever forecasts can be rendered useless by unanticipated events (or my sheer stupidity) so always use stops if you can’t watch the market like a hawk — especially if you’re an active intra-day trader.  For tracking purposes, I usually use 3 points.  It’s arbitrary, I know.  But, it seems to usually make sense.

I tend to use trend lines and chart patterns as triggers rather than specific price levels.  This means stops can change, as trend lines change in price over time.   Everyone has different comfort levels, liquidity needs and risk tolerance.  Set your stops where you’re comfortable — and try to avoid obvious levels like round numbers, etc.  Market makers love to stop you out before a major run that might have benefited you.

Last, I read everything that comes my way, even if I can’t respond right away.  If you have a question about something I’ve written, use the Comment section.  Chances are that others might also be confused and would benefit from the answer, and I rarely respond to emails during the trading day.

If your question is something along the lines of “why is the market going down, I thought you said it would go up!?” don’t bother.  I’m already working on it.  A reminder of my own fallibility won’t do much to help me help you — which is whole the point, right?  Our community is very well-mannered, and I’ve only had to censure comments a few times that I can remember.  Keep it civil and constructive, and it’ll never happen to you.

We have a very bright and capable membership.  Most of you are brokers, investment advisors or managers of mutual funds, hedge funds or family offices.  The rest are mostly very experienced traders.  Some of you have expertise in other techniques or strategies that would be of interest to your fellow members, or you might simply catch something I missed.  Share and share alike, and your generosity will usually be repaid in full.

Summary

I’ll update this page periodically as I have time.  Please feel free to make suggestions. Most improvements to the site over the past year have come from you.  And, as always, thanks for being a member of pebblewriter.  I’ll do my best to be worthy of that honor.

p.w.

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