SPX came within 2 points of our upside target yesterday in a VIX-inspired meltup that was focused on getting and keeping the index above the 2500 mark.  While VIX has already staged obvious breakdowns of its rising yellow TL and rising purple channel, it has managed to keep stocks on the rise by simply drifting… Lower. Every. Day.

With ES up only 1.75 at present, it appears we’re not going to be presented with a reason to reverse just yet.

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When I first started pebblewriter.com over six years ago bad news was bad news, dips sometimes developed into routs, and there was good money to be made from directional bets.  We profited handsomely from shorting in July 2011, September 2012, May 2015, and November 2015.

But, central bankers have become increasingly involved in propping up stocks.  As a result of their heavy intervention, “buy the f-ing dip” has gone from a laugh line to a legitimate investment strategy.

Early on, QE, QQE and APP were used to prop equities up — but at considerable cost and with limited ability to fine tune.  Between 2011-2015, the yen carry trade provided most of the impetus but entailed significant currency-related side effects.  In 2016, a sharp recovery in oil prices fueled algorithms but drove inflation higher.  And, post-Brexit and the US election, VIX manipulation has become a force to be reckoned with.

Six months ago [see: Why the Trump Rally is a Fraud] I noted that manipulation had become so ubiquitous that it’s become difficult to profit from directional trades.  I needn’t remind members that we frequently had 5-10 false alarms before a plunge was finally allowed to occur — if it was at all.

I’ve mentioned to many clients that it’s become easier to trade USDJPY, CL and VIX themselves rather than equities. As tools, their individual actions are much easier to forecast than their combined effects.

It’s nearly impossible, for example, to know when VIX will suddenly be pounded into the sand.  It is much easier, however, to predict when the BoJ will crush the yen, oil will ignore inventory data and spike higher, the US dollar will plunge in response to Fed inaction, and gold will react to the latest machinations.

Last week, in The Case for Active Trading, I presented the results from our oil forecasts.  Not that this will ever be repeated, but our 36 calls since Oct 2014 averaged 16%.  If one were to have participated in each (averaging one trade/month) and rolled their profits from each trade into the next (compounding), an investment of $100 would have grown to roughly $23,000.

We’ve also had very good results in gold.  We’ve been much less active, with only eight calls since Dec 2015. Even so, as of our most recent Update on Gold: Sep 6, we have averaged 9.4% per call, meaning $100 would have grown to $204 with very little trading.

I’ve yet to tally the results, but I believe our track record in USDJPY, DX and RB has been comparable.  Why, then, spend a lot of time trying to outwit the algos in trading equities?  Why, indeed.

Going forward, I will post the same charts I always post, continuing to provide daily target prices when possible and a mid- to longer-term forecast as it evolves.  But, for the time being, I will only make note of specific opportunities in equities when there’s a clear breakout or breakdown (e.g. go long on the breakout past 2490.87, target 2510.87, trailing stops at the SMA5 200.)  Traders determined to play the squiggles should have plenty of ammunition.

Those who don’t want to be glued to their computer all day and/or would like to trade much less frequently can follow my thoughts on USDJPY, DXY, CL, RB, VIX, EURUSD, etc.  I’ll update each as often as necessary, with the pages dedicated to each serving as info central.  Currently, we have trade ideas outstanding in DXY and CL/RB.  We recently closed out a profitable trade in gold.

I will dedicate the Current Forecast page to summarizing all the recommended positions so members can get a quick summary of where we are and where we’re going.

As members know, these forecasts and trade suggestions are not made with your particular circumstances in mind.  Some of you are quite conservative and merely wish to avoid the next downdraft (not to worry, this will continue to be covered.)

Others of you are quite aggressive and love to trade each recommendation as soon as it’s posted.  While you might suffer withdrawal symptoms from the reduced pace of recommendations, I believe this is a more sane approach to trading.  In the long run, I expect most of you will favor this shift in focus.

As always, recommendations will be made and results calculated on an unleveraged basis (i.e. cash-on-cash.)  If you choose to use leverage to amplify your returns, be aware that you increase your risk at the same time.  Anyone who doesn’t understand exactly what this means should not be trading futures contracts.  Period.

Although I chart using futures contracts (e.g. CL, which is an abbreviation for Crude Light, West Texas Intermediate Oil futures) there are usually good ETF proxies for those wishing a lower octane approach.  I prefer futures only because trading costs are low and they can be traded nearly 24/7.  And, remember, you can always trade futures without leveraging your position.

As always, I welcome your feedback.  Please reach out with any comments, questions or suggestions.

 

 

 

 

 

 

VIX, USDJPY and CL are all working to keep stocks afloat in the run-up to this week’s FOMC meeting.  Aside from its rising purple channel breaking down, VIX dropped below its recent low of 10.02 on Friday. This is nothing new, as it’s important to central banks that their policies be seen as beneficial to “markets.”  ES is currently up 4 points.

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SPX backtested the former highs yesterday, coming within 0.46 of our downside target before being magically levitated by the threat of a drop in VIX and intraday pushes in both DXY and CL.  Unfortunately, for the bulls, those pushes have fizzled as real, live geopolitical concerns have once again bubbled to the surface.continued for members… (more…)

CPI came in at 1.9%, exactly where we expected and good enough to keep DXY steady…for now.  From Was That It? on Sep 6:

The EIA is showing a very healthy monthly increase in average gas prices for August (3.9% MoM and 8.4% YoY.) I believe this is understated, but my back of the envelope calculations indicate CPI should come in at 1.9% or higher.

Futures are off modestly, though.  And, DXY’s initial burst higher seems to be unwinding.  With an FOMC meeting coming up next week, we can expect traders to pay very close attention to how the markets react to the inflation data.

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I update the USDJPY charts every day, but it’s been a while since we last took a look at the pair from 30,000 feet.  In our May 17 Update, we noted it had rejoined its well-formed falling white channel and was headed for a tag of the rising white channel bottom — though there were important interim Fib levels with which to contend.

Otherwise, the downside targets originally contemplated are all in play: the red .618 at 107.86, the purple .618 at 106.50 and the red .786 at 104.92.

It turned out that breaking out of the falling white channel was a pretty healthy development for stocks — so much so that it did so again, and again, and again.  Not that there is such a thing, but it probably set a record for backtesting a channel.

The net effect was that the rising white channel tag was delayed, coming in at a much higher price than if the falling channel were allowed to play out. The original intersection of the two was mid-late July.Thus, even though USDJPY registered new lows, stocks were supported in setting new all-time highs.

USDJPY came within 0.81 of our 106.50 target last week, and has since rebounded sharply.  Is the worst behind us, or is there more downside ahead?

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I’m sure you get almost as tired reading it as I do writing it.  SPX will make new highs today on yet another crash in VIX.  The latest came courtesy of a rising channel (below, in purple) which has ever-so-conveniently broken down.  The algos are feasting on its remains.

When the channel broke down the first time on the 31st, SPX was able to break out of its falling channel.  When it broke down again (16.6% off Friday’s highs) yesterday, SPX was able to come within pennies of its former highs.

Today’s 2-3% additional decline in VIX should be enough to establish new highs. While hardly a new development, one has to wonder: just how long can this go on?

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For most investors, there’s nothing wrong with passive investing.  Most of the time, it works just fine: minimizes expenses, avoids “underperformance” and saves taxes.  And, it’s becoming increasingly popular.  JPMorgan estimates that fundamental discretionary traders account for only 10% of daily trading volume.

But, we all remember 2007-2009, when a little market timing would have come in real handy.  Of course, that period was followed by a pretty strong meltup which erased all those nasty losses (and, then some) if one was able to avoid (or, better yet, capitalize on) the volatility during 2015-2016.

Whether active trading is right for you depends on more than market conditions.  What are your cash flow needs?  How much volatility can you stomach?  How aggressive or risk averse are you?  What tax bracket are you in?  And, most importantly, what are the alternatives?

There’s no doubt that active trading is hard.  And, it’s getting harder.  Both fundamentals and technicals seem out of touch with reality half the time.  The rest of the time, they suggest diametrically opposed outcomes.

Recently, a client congratulated me on some decent calls in oil over the past year.  This happened at about the same time that Andy Hall — such a successful oil trader that his nickname was “God” — announced he was closing his fund after sustaining large losses in 2016 and 2017.

How could someone that experienced and savvy do so poorly?  Maybe it was time to go back and see exactly how we had done.  Note: I haven’t tracked performance in anything other than equities, and I’m months behind on tallying that.

Sure, it works in practice.  But, will it work in theory?

I started making active calls in oil (West Texas Intermediate or WTI, symbol CL) futures on October 14, 2014 when CL was 82.27 and falling.  I expected it to continue falling to at least 74 or 64, a target that was lowered many times over the following 16 months (along with many bounces involving higher target prices.)

Had we simply shorted it there and covered yesterday, we’d be sitting on a nice gain of 39.6%.  That would easily rank us in the top 10% of all energy-related hedge funds in terms of performance over the past three years.If we had used the 200-day moving average to signal long/short trades, our return would have improved to about 79% — doubling our outcome with minimal additional effort.

If we used both the 200-day (red) and 20-day (white) moving averages to guide us, the return would have been even better: about 1,772%.Last, utilizing basic Fibonacci patterns, trend lines, moving averages, chart patterns, and (the secret sauce) considering the effect that oil prices have on algorithms, we posted the following buy and sell signals over the past three years.  The buy signals are marked with yellow arrows and the sell signals with red.The net effect was significantly better than either of the moving average approaches and insanely better than the “set and forget” approach.

Again, the point isn’t that active trading will always be more effective than passive or some derivation thereof.  And, I’m certainly not claiming to have found a foolproof way to earn 22,000% over the next three years.

Rather, the point is that active trading can be much more rewarding than passive investing — when incorporating the proper signals.

What are the proper signals?

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USDJPY and VIX have driven futures 13 points higher this morning, even as gasoline prices continue to plunge.continued for members… (more…)

DXY continues tumbling toward our downside target [see: Capitulation, Aug 21] taking USDJPY with it.  Although VIX is still in the basement, CL hasn’t broken out.  So, stocks don’t have much upside impetus.

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